GBP/JPY advances above 157.00 as UK yields surge, eyes annual highs around 158.00

• GBP/JPY advanced above 157.00 on Monday despite a somewhat risk-off market feel and is eyeing annual highs near 158.00.
• The pair was lifted by a surge in UK yields in tandem with their global peers.
• With dovish vibes expected from BoE’s Bailey later this week and fragile risk appetite, further upside may be more limited.

GBP/JPY’s post-dovish BoE policy announcement weakness last Thursday is now well in the rearview mirror, with the pair confidently pushing to the north of the 157.00 level and eyeing a test of annual highs around 158.00. It was a slightly risk-off session on Monday, with US equities falling as energy prices rose sharply, keeping inflation fears alive, while hawkish remarks from Fed Chair Powell stocked fears about the pace of US monetary policy tightening. That might typically weigh on GBP/JPY, but another key feature of Monday trade was a big rally in global (non-Japan) bond yields, led by a move higher in US yields.

The yen is sensitive to rising rates internationally as the Bank of Japan keeps yields fixed around zero all the way up to 10 years out with its Yields Curve Control policy. The fact that UK yields were up more than 10bps all the way across the curve has thus contributed to a significant widening of UK/Japan rate differentials, thus encouraging yen to sterling flows. After breaking above all of its major moving averages in the last few weeks, GBP/JPY still looks very much odds on to test annual highs around 158.00.

But traders would be wise not to count on rising UK yields pushing the pair ever higher as, say, has been the case with US yields and USD/JPY as of late. While this week’s UK Consumer Price Inflation data out on Wednesday might well further spice up, BoE Governor Andrew Bailey is likely later in the day to remind markets that only “modest” further tightening “might” be likely. Indeed, the BoE sounded much more worried about growth risks and the hit to real incomes over the coming months than it did about containing inflation.

Against the backdrop of a BoE likely to underwhelm the market’s tightening expectations, the prospect for a sustained break above 158.00 in the near term isn’t great. Not unless there is a massive further spurt in risk appetite (i.e. global equities recovering ground like they did last week). Amid seemingly stagnant Russo-Ukraine peace talk progress and a Western coalition likely to continue toughening Russia sanctions (the chatter now is of an EU embargo on Russian oil), plus also rising recession fears as the Fed warns of faster tightening ahead, the prospect for a continued risk appetite rally isn't good.