GBP/JPY struggles to capitalize on intraday recovery from multi-week low, BoJ awaited

• GBP/JPY stages a goodish recovery from the vicinity of its lowest level since mid-June.
• Some repositioning trade ahead of the key BoJ decision prompts intraday short-covering.
• Diminishing odds for more aggressive BoE rate hikes keep a lid on any meaningful upside.

The GBP/JPY cross attracts some buying near the 177.50 area during the Asian session on Friday and stages a modest bounce from its lowest level since mid-May touched the previous day. Spot prices climb to a fresh daily peak in the last hour, albeit lack any follow-through beyond mid-178.00s as traders keenly await the outcome of the highly-anticipated two-day Bank of Japan (BoJ) policy meeting.

Some repositioning trade ahead of the key central bank event risk turns out to be a key factor behind the GBP/JPY pair's intraday recovery of around 100 pips. The upside, however, remains capped in the wake of speculations that the BoJ might tweak its Yield Curve Control (YCC) policy. The bets were reaffirmed by stronger Tokyo CPI figures, which unexpectedly rose in July, and remain well above the BoJ’s 2% target range. This, in turn, pushes the yield on the 10-year Japanese Government Bond (JGB) above the BoJ's tolerance band, which, along with a softer risk tone, underpins the safe-haven Japanese Yen (JPY) and acts as a headwind for the cross.

Apart from this, diminishing odds for more aggressive rate hikes by the Bank of England (BoE), bolstered by softer UK consumer inflation figures last week, contributes to capping the upside for the GBP/JPY cross. That said, BoJ Governor Kazuo Ueda reiterated that the central bank will stick to its accommodative monetary stance and added that the long-term yield rate remains stable under the YCC policy. Moreover, a government spokesperson noted earlier this week that Japan's inflation will likely slow to around 1.5% next year when stripping away the effect of one-off factors. This, in turn, is holding back traders from placing aggressive directional bets.

Technical levels to watch