GBP/JPY sticks to intraday gains around 166.25-30 area, lacks bullish conviction

• GBP/JPY gained traction for the second straight day on Monday, though lacked follow-through.
• A generally positive risk tone undermined the safe-haven JPY amid the BoJ’s dovish outlook.
• Recession fears, bets for more gradual BoE rate hikes capped the upside amid Brexit woes.

The GBP/JPY cross attracted some dip-buying near the 165.15-165.10 region on Monday and turned positive for the second successive day. The cross maintained its bid tone through the early European session and was last seen trading around the 166.30 area, just a few pips below the daily high touched in the last hour.

The recent slump in commodity prices now seems to have eased fears about the persistent rise in inflationary pressures and boosted investors' confidence. This was evident from a generally positive tone around the equity markets, which, along with a more dovish stance adopted by the Bank of Japan, undermined the safe-haven Japanese yen. On the other hand, the British pound drew some support from the prevalent US dollar selling bias. The combination of supporting factors assisted the GBP/JPY cross to gain some positive traction on the first day of a new week, though the upside is likely to remain capped.

The incoming softer UK economic data have been fueling fears about a possible recession. This, along with the social and political unrest, points to further instability in the UK and could force the Bank of England to opt for a more gradual approach toward raising interest rates. Apart from this, the UK-EU impasse over the Northern Ireland Protocol of the Brexit agreement could act as a headwind for the British pound. This, in turn, should hold back bulls traders from placing aggressive bets and keep a lid on any meaningful gains for the GBP/JPY cross, at least for the time being.

There isn't any major market-moving economic data due for release on Monday, leaving spot prices at the mercy of the broader market risk sentiment. Traders will further take cues from the USD price dynamics, which will influence the GBP and contribute to producing short-term opportunities around the GBP/JPY cross.

Technical levels to watch