GBP/JPY surrenders a major part of its intraday gains, manages to hold above 181.00 mark

• GBP/JPY struggles to capitalize on its modest intraday gains on Friday.
• The BoE’s hawkish signals turn out to be a key factor capping the upside.
• The BoJ’s dovish stance and a positive risk tone should help limit losses.

The GBP/JPY cross surrenders a major part of its modest intraday gains and retreats to the 181.15-181.20 region during the early part of the European session on Friday. Spot prices, however, manage to hold above the weekly low touched on Thursday.

The Bank of England (BoE), as was widely anticipated, raised its key interest rate by 25 bps to a 15-year peak level of 5.25% on Thursday, though signalled that the tightening cycle may be nearing an end. The UK central bank called its current monetary policy stance "restrictive", forcing investors to scale back expectations for the peak rate. This, in turn, holds back traders from placing aggressive bullish bets around the British Pound and turns out to be a key factor capping the upside for the GBP/JPY cross.

The downside, however, seems limited, at least for the time being, in the wake of a more dovish stance adopted by the Bank of Japan (BoJ) and a positive risk tone, which tends to undermine the safe-haven Japanese Yen (JPY). In fact, the Japanese central bank last week took steps to make its Yield Curve Control (YCC) policy flexible, fueling speculations about an imminent shift away from the ultra-loose monetary policy. The BoJ, however, moved quickly to dampen speculation about an early end to the negative rate policy.

Furthermore, BoJ Governor Kazuo Ueda reiterates that the central bank won't hesitate to ease policy further and that more time was needed to sustainably achieve the 2% inflation target. Adding to this, the minutes from the BoJ policy meeting showed that members agreed to maintain the current easy monetary policy. This, in turn, should act as a tailwind for the GBP/JPY cross and limit the downside.

The aforementioned fundamental backdrop, meanwhile, suggests that the path of least resistance for spot prices is to the upside, suggesting that any subsequent slide is more likely to get bought into. This makes it prudent to wait for strong follow-through selling before confirming 
that the recent strong rally of nearly 700 pips from a six-week low touched last Friday has run its course.

In the absence of any relevant market-moving economic releases from the UK, traders on Friday will take cues from the BoE Chief Economist Huw Pill's scheduled speech. Apart from this, the broader risk sentiment might influence demand for the safe-haven JPY and contribute to producing short-term trading opportunities around the GBP/JPY cross on the last day of the week.

Technical levels to watch