GBP/JPY falls back under 160.00 mark as yen shorts pared, bears eye retest of 158.00 support

• The yen’s broad recovery continued for a second day on Wednesday as traders continued to pair short positions.
• GBP/JPY dipped as low as the 159.00 level at one point, but has since recovered back to the 160.00 area.
• BoJ relative dovishness, even versus an increasingly less hawkish BoE, plus falling geopolitical risk premia suggests support for the pair.

The yen’s broad recovery continued for a second day on Wednesday as traders continued to pair short positions against the currency in wake of recent jawboning from BoJ and Japanese government policymakers regarding JPY weakness. GBP/JPY thus dipped as low as the 159.00 level at one point but has since recovered back to the 160.00 area, where it continues to trade with on the daily losses of around 0.5%, meaning the pair has reversed nearly 3.0% lower versus earlier weekly highs in the mid-164.00s.

The recent pullback does not mean that the yen has suddenly become a long-term buy and GBP/JPY is set to fall back to earlier sub-151.00 monthly lows. Rather, the short-term bears riding a wave of profit-taking on recent GBP/JPY longs, which numerous technical indicators over the past few sessions had suggested had become heavily overbought at the start of the week, are likely targeting a retracement back to prior Q1 2022/Q4 2021 highs in the 158.00 area. Here, the longer-term and more patient GBP/JPY bulls may be inclined to add to long positions with a view to target an eventual move back into the mid-160s.

Recent BoJ insistence that it wants to stick to ultra-dovish policy, which it has backed up in recent days via market interventions to prevent Japanese 10-year yields moving above the top of the -0.25% to 0.25% target range, isn’t likely to change any time soon. That means that, even if the BoE is sounding much less hawkish as of late, rate differentials are likely to continue moving in sterling’s favour (against the yen anyway, though not versus most of the rest of the G10). That, combined with a recent unwind in geopolitical risk premia on a more promising tone to Russo-Ukraine peace talks, could keep the pair underpinned in the medium-term.