GBP/JPY retreats from multi-year tops, still comfortable above 157.00 mark

• GBP/JPY retreated over 100 pips from multi-year tops amid reviving demand for the safe-haven JPY.
• A stronger USD weighed on the British pound, which further contributed to the intraday selling bias.
• Expectations that the BoE will hike interest rates in 2021 should help limit any deeper corrective slide.

The GBP/JPY cross maintained its offered tone through the first half of the European session, albeit has managed to hold its neck above the daily swing lows. The cross was last seen trading just below mid-157.00s, still down around 0.40% for the day.

The cross struggled to find acceptance above the 158.00 round figure for the second successive day and witnessed a modest pullback on Thursday, from the highest level since June 2016. The risk-off impulse in the markets benefitted the safe-haven Japanese yen, which, in turn, was seen as a key factor that prompted some selling around the GBP/JPY cross.

Worries about potential contagion from China Evergrande's debt crisis resurfaced after the heavily indebted developer said on Wednesday that a $2.6 billion stake in its property services unit failed. This, in turn, tempered investors' appetite for perceived riskier assets and drove flows towards traditional safe-haven currencies, including the JPY.

Meanwhile, the global flight to safety assisted the US dollar to stage a modest bounce from three-week lows and exerted some pressure on the British pound. This was seen as another factor that contributed to the GBP/JPY pair's slide of over 100 pips. That said, rising bets for an imminent rate hike by the Bank of England in 2021 helped limit deeper losses.

Wednesday's softer UK consumer inflation figures might have forced investors to trim their bets for an immediate BoE rate hike move in November. Investors, however, seem convinced that the decline will be temporary and that the BoE will eventually hike interest rates from record lows before the end of this year, which might act as a tailwind for the sterling.

Hence, it will be prudent to wait for a strong follow-through selling before confirming that the recent strong bullish trajectory witnessed since the beginning of this month has run out of steam. From current levels, the daily lows, around 157.10 area, might protect the immediate, which if broken might prompt some technical selling around the GBP/JPY cross.

Levels to watch