GBP/JPY slides to fresh daily low, closer to 185.00 mark; downside potential seems limited

• GBP/JPY comes under heavy selling on Thursday amid reviving demand for the safe-haven JPY.
• Weaker US macro data, mixed Chinese PMIs fuel recession fears and drive some haven flows.
• The BoJ-BoE policy divergence should lend some support and help limit any further downfall.

The GBP/JPY cross attracts some sellers near the 186.00 round-figure mark on Thursday and continues drifting lower through the early part of the European session. Spot prices drop to a fresh daily low, around the 185.15-185.10 region in the last hour and reverse a part of the previous day's positive move to over a one-week high.

The disappointing US macro data released on Wednesday was seen as a sign that the surprisingly resilient US economy might be starting to lose steam in the wake of rapidly rising interest rates. Adding to this, the mixed Chinese PMIs do little to ease worries about a deeper global economic downturn, which drives some haven flows towards the Japanese Yen (JPY) and turns out to be a key factor dragging the GBP/JPY cross lower.

The JPY draws additional support from the better-than-expected release of domestic Retail Sales, which rose by 6.8% YoY in July and helps offset a larger drop of 2.0% in Industrial Production during the reported month. That said, the Bank of Japan's (BoJ) dovish outlook should keep a lid on any meaningful appreciating move for the JPY and help limit the downside for the GBP/JPY cross, at least for the time being.

It is worth recalling that the BoJ is the only central bank in the world to maintain negative interest rates and is expected to stick to its current ultra-easy monetary policy stance. In fact, BoJ board member Toyoaki Nakamura said this Thursday that it was premature to tighten monetary policy as recent increases in inflation were mostly driven by higher import costs rather than wage gains. This follows last week's dovish remarks by BoJ Governor Kazuo Ueda, saying that the underlying inflation in Japan remains a bit below the 2% target.

This ensures that the Japanese central bank may keep the status quo until next summer. In contrast, the Bank of England (BoE) is anticipated to continue with its policy tightening cycle to combat high inflation. The bets were reaffirmed by BoE Deputy Governor Ben Broadbent's comments, saying that policy rates may well have to remain in restrictive territory for some time as the knock-on effects of the surge in prices were unlikely to fade away rapidly. Furthermore, BoE Chief Economist Huw Pill noted that inflation in the UK remains "too high".

Pill added that there is no room for complacency on inflation and that there is a lot of policy in the pipeline to come through. This, in turn, warrants some caution before placing aggressive bearish bets around the GBP/JPY cross. Hence, it will be prudent to wait for strong follow-through selling before positioning for the resumption of the recent pullback from the highest level since November 2015 touched earlier this month.

Technical levels to watch