GBP/JPY stabilises above 154.00 after recent risk-on surge, eyes return to October’s 158.00 highs in 2022

• GBP/JPY has dipped back from earlier highs above 154.50, but remains support above 154.00, well above last week’s sub-150.00 lows.
• The pair has been supported by a drastic improvement in the market’s overall appetite for risk as Omicron fears subside.
• Over the course of Q1 2022, BoE tightening and widening UK/Japan rate differentials could see the pair recover to 158.00.

GBP/JPY has pulled back from earlier session highs that saw the pair briefly surpass 154.50 for the first time since 17 November, and even then only come within a whisker of that day’s 154.74 high. GBP/JPY is now trading just above the 154.00 level having found decent buying interest at the big figure, having fallen back from earlier session highs as risk-sensitive currencies undergo a modest technical correction of their recent run of gains versus safe-haven currencies like the yen.

In the context of the recent run of gains experienced by GBP/JPY since last Monday’s lows, Tuesday’s very modest just over 0.1% reversal from highs is just that, very modest. The pair still trades more than 3.0% higher versus Monday’s sub-150.00 lows and an even healthier 3.5% up from December’s near-149.00 lows. The 148.50-149.00 area has proven to be a key zone since the start of Q2 2021 and seemingly lived up to expectations in December once more.

The main driver of the rally in GBP/JPY over the last slightly more than one week has been a drastic improvement in the market’s overall appetite for risk (US equities have soured to fresh record levels in a belated year-end Santa rally). As the Omicron variant spreads rapidly across the world, it appears to be living up to the “best-case scenario” of being very mild in comparison to prior strains, according to a succession of early studies. It hasn’t yet triggered a healthcare system threatening surge in hospitalisations anywhere in the world and, as a result, the UK government is holding off on imposing tougher curbs for now, as are other parts of the world.

Given the UK economy, an early Omicron epicentre in Europe was seen as particularly vulnerable to lockdowns/a spike in hospitalisations as recently as two weeks ago, the recent run of positive developments has seen GBP perform particularly well. A less concerning Omicron picture likely gives the BoE, who kicked off their rate hiking cycle earlier on in the month, the green light to continue hiking interest rates in February.

As the BoE/BoJ rate differential widens in the coming months, this could support further strides higher in GBP/JPY so long as risk appetite doesn’t take any further batterings. That suggests that the recent rebound from close to 149.00 to above 154.00 has legs to continue back towards October highs at 158.00 over the course of Q1 2022. Until the start of the new year, however, things may be subdued for the pair, with FX markets likely to remain to a large degree in holiday mode.