GBP/JPY spikes beyond 163.00 mark on UK political headlines, lacks follow-through

• A combination of factors assisted GBP/JPY to build on the overnight bounce from a multi-week low.
• A positive risk tone, dovish BoJ weighed on the safe-haven JPY and acted as a tailwind for the cross.
• Reports that UK PM Johnson will resign provided a modest lift to the GBP and remained supportive.

The GBP/JPY cross built on the previous day's strong rebound from the 160.40-160.35 region, or a nearly three-week low and gained strong positive traction on Thursday. The recovery momentum extended through the early part of the European session and pushed spot prices back above the 163.00 round-figure mark.

Against the backdrop of the divergent monetary policy stance adopted by the Bank of Japan and other major central banks, a slight recovery in the risk sentiment undermined the safe-haven Japanese yen. On the other hand, the British pound drew some support from a modest US dollar pullback from a two-decade high, which, in turn, acted as a tailwind for the GBP/JPY cross.

The latest leg up followed reports that the British Prime Minister will announce his resignation. This marks the end of the recent political drama in the UK and offered some respite to the GBP bulls. That said, worries that the UK government's controversial Northern Ireland Protocol Bill could trigger a trade war with the European Union might continue to act as a headwind for sterling.

Apart from this, expectations that the Bank of England would adopt a gradual approach towards raising interest rates amid growing recession fears capped the upside for the GBP/JPY cross. Furthermore, the worsening global economic outlook should keep a lid on any optimistic move in the markets and supports prospects for the emergence of fresh selling around the pair at higher levels.

From a technical perspective, spot prices have repeatedly shown resilience and bounced from the very important 200-day SMA. The mixed set-up warrants some caution for aggressive traders and before positioning for any firm near-term direction for the GBP/JPY cross.

Technical levels to watch