GBP/JPY traces downbeat yields near 161.00 ahead of BoE on “Super Thursday”

• GBP/JPY keeps pullback from one-week high, fades corrective bounce off 160.80.
• Yields tumbled after Federal Reserve, US Treasury announcements.
• Reuters Tankan Survey for Japan suggests pessimism at big manufacturing firms.
• Strong UK inflation backs BoE’s 0.25% rate hike but Brexit woes, banking fears may probe GBP bulls.

GBP/JPY drops to 161.00 as it traces downbeat Treasury bond yields during early hours of “Super Thursday”, ahead of the Bank of England (BoE) monetary policy announcements. In doing so, the cross-currency pair not only traces bond coupons but also portrays the broad weakness in the British Pound (GBP) ahead of the key event.

US 10-year and two-year Treasury bond yields both dropped the most in a week after the US Federal Reserve (Fed) failed to push back the banking sector fears despite announcing a 0.25% rate hike. The reason could be linked to the statements saying, “some additional policy firming may be appropriate,” instead of previous remarks like “ongoing increases in the target range will be appropriate”.

It should be noted that Fed Chair Jerome Powell and US Treasury Secretary Janet Yellen’s comments triggered a corrective bounce in the bond market but the same couldn’t last long.

Fed Chair Powell said that officials do not see rate cuts for this year, which in turn allowed breathing space to the greenback bears in the last. On the other hand, US Treasury Secretary Janet Yellen ruled out considering “blanket insurance” for bank deposits. Recently, Bloomberg also came out with the news suggesting that the Federal Deposit Insurance Corporation is said to delay the bid deadline for a silicon valley private bank.

Amid these plays, the US 10-year and two-year Treasury bond yields stay pressured around 3.45% and 3.96% at the latest while the S&P 500 Futures print mild gains even after Wall Street’s downbeat performance.

It’s worth noting that the GBP/JPY pair’s latest losses ignore downbeat results from the monthly Reuters Tankan survey as it said, “Big Japanese manufacturers remained pessimistic about business conditions for a third straight month in March.”

Furthermore, strong inflation data from the UK and British PM Rishi Sunak’s victory in getting the Brexit bill passed through the House of Commons, despite major Tory rebels, also should have favored the GBP/JPY buyers but could not.

That said, UK’s headline inflation data, namely the Consumer Price Index (CPI) rose to 10.4% YoY in February versus 9.8% expected and 10.1% previous readings while the Core CPI rose to 6.2% compared to 5.8% market forecasts and previous readings. Given the improvement in the British inflation figures, the Bank of England (BoE) may be able to perform well in its likely last hawkish dance.

On the other hand, The Guardian said, "Rishi Sunak has escaped an overly damaging Commons rebellion over his revised plan for post-Brexit Northern Ireland trade, winning a vote on the measure with 22 of his own MPs voting against the deal."

Moving on, the BoE's 0.25% rate hike is already given and may not entertain GBP/JPY traders much, apart from initial whipsaw, unless the inflation outlook and BoE Minutes suggest further rate lifts.

Also read: BoE Interest Rate Decision Preview: Preparing the ground for a rate hike pause in May

Technical analysis

A one-month-old descending trend line and 200-DMA, respectively around 163.15 and 163.30, restrict short-term upside of the GBP/JPY pair.