GBP/JPY surges above 157.50, eyes test of 2021 highs above 158.00 as RSI suggests overbought

• GBP/JPY rallied above 157.50 to hit fresh multi-month highs, as bulls eye a test of 2021 highs above 158.00.
• Traders should beware that the 14-day RSI is now in overbought territory above 70.00.

GBP/JPY has rallied to fresh multi-month highs in recent trade above the 157.50 level, its highest point since late October. The pair now trades 0.3% higher on the day, having reversed earlier losses that saw it dip as low as 156.60. The latest bout of gains come despite stability in developed market bond markets on Wednesday. Perhaps the weakening yen is reacting in belated fashion to Monday and Tuesday’s surge in (non-Japan) developed market bond yields, or in anticipation that the run higher has further to go.

Sterling may also have garnered further impetus after UK PM Boris Johnson reiterated for a second day running that he was keen to avoid more lockdowns, despite also noting a rapid rise in hospital admissions. However, sterling’s performance is roughly in line with other outperforming G10 currencies on the day including the euro, Aussie and kiwi (all of which are up 0.2-0.3% versus the yen).

GBP/JPY bulls will be eyeing a test of the 2021 highs just to the north of the 158.00 level amid a lack of any notable resistance in the interim. Traders should beware, however, that GBP/JPY’s 14-day Relative Strength Index is in overbought territory above 70.00, suggesting that it may be difficult for the pair to manage a sustained break above resistance at 158.00.

The yen did not seem to react much to newswires reporting that BoJ sources had told them the bank would be upping its fiscal year 2022 forecasts at the coming meeting earlier on Wednesday. Whilst the core inflation forecast for the coming fiscal year was set to be lifted above 1.0% (from the current 0.9%), it will remain well below th BoJ’s 2.0% target, this will not prompt any policy shift from the bank. As long as the BoJ maintains its ultra-dovish stance as Japan continues to face deflation risks, the yen will continue trading as a function of global themes, risk appetite and bond yields.