GBP/JPY recovers a major part of its intraday losses, holds above mid-156.00s

• GBP/JPY dropped to the 156.00 area during the Asian session, albeit quickly recovered thereafter.
• Russia-Ukraine tensions benefitted the safe-haven JPY and prompted some selling around the cross.
• Bets for additional BoE rate hikes underpinned the British pound and helped limit any further losses.

The GBP/JPY cross quickly recovered around 60 pips from the daily low and was last seen trading with modest intraday losses, near the 156.65 region.

Having struggled to find acceptance above the 157.00 mark, the GBP/JPY cross witnessed heavy selling during the Asian session on Thursday amid anxiety over the Russia-Ukraine standoff. In the latest developments, Western countries warned on Wednesday that there were no signs of de-escalation on the ground from the Russian side.

Apart from Russian media reported this Thursday that rebels in eastern Ukraine accused government forces of shelling their territory. This triggered a fresh wave of the global risk-aversion trade and led to a sharp decline in the equity markets, which benefitted the Japanese yen's safe-haven status and exerted pressure on the GBP/JPY cross.

The knee-jerk reaction, however, turned out to be short-lived after details suggested that the incident occurred within the contested area of Donbas. On the other hand, rising bets for more rate hikes by the Bank of England acted as a tailwind for sterling. This, in turn, assisted the GBP/JPY cross to attract some buying ahead of the 156.00 mark.

Against the backdrop of Tuesday's stronger UK wage growth figures, hotter-than-expected UK inflation figures released on Wednesday lifted expectations for a 50 bps rate hike at the March MPC meeting. In fact, the annual UK inflation rate, as measured by CPI, climbed for the 13th month to its highest level in almost 30 years and came in at 5.5% in January.

That said, tensions over the Northern Ireland Protocol of the Brexit agreement held back bulls from placing aggressive bets around the British pound and capped the upside for the GBP/JPY cross. In the absence of any major market-moving economic releases from the UK, it will be prudent to wait for some follow-through buying before positioning for further gains.

Technical levels to watch