GBP/JPY reverses a major part of its heavy intraday losses, back above mid-154.00s

• GBP/JPY stages a solid intraday recovery from its lowest level since February 2021.
• Speculations for BoE intervention prompt intraday short-covering around sterling.
• A turnaround in the risk sentiment weighs the safe-haven JPY and offers support.

The GBP/JPY cross recovers a major part of its intraday slump to the lowest level since February 2021 and climbs back above mid-154.00s during the early European session.

Speculation that the Bank of England will step in to stabilise the domestic currency helps the British pound to stall its free-fall following the new UK government's mini-budget on Friday. This, along with a turnaround in the global risk sentiment, undermines the Japanese yen's relative safe-haven status and prompts aggressive short-covering around the GBP/JPY cross.

The JPY is also weighed down by a dovish stance adopted by the Bank of Japan in comparison to other major central banks. This is reaffirmed by the short-lived reaction to the intervention of Japanese authorities to stem the recent rapid fall in the JPY. Despite the supporting factors, any meaningful upside for the GBP/JPY cross remains elusive, warranting caution for bulls.

The most radical fiscal plan since 1972 could undermine the BoE’s goal to tame inflation amid looming recession risks. The UK Finance Minister Kwasi Kwarteng announced reductions in the top rate of income tax, national insurance, and stamp duty. This, along with the UK Prime Minister Liz Truss' plans to subsidize energy bills, threatens to stretch Britain's finances to their limits.

Investors are showing less confidence in the UK government’s ability to manage the ballooning debt, which might continue to act as a headwind for sterling. Adding to this, worries about a deeper global economic downturn and geopolitical risk should keep a lid on any optimistic move in the markets. This could lend support to the safe-haven JPY and cap the upside for the GBP/JPY cross.

Technical levels to watch