GBP/JPY trades with modest losses around 153.25-20 area, seems vulnerable

• GBP/JPY met with fresh supply on Tuesday and eroded a major part of the overnight gains.
• The risk-off impulse underpinned the safe-haven JPY and exerted some downward pressure.
• Weaker USD benefitted the British pound and helped limit any further losses, at least for now.

The GBP/JPY cross traded with a negative bias through the early European session, albeit has retreated a few pips from daily lows. The pair was last seen hovering around the 153.25-20 region, down over 0.25% for the day.

The cross struggled to capitalize on the previous day's attempted recovery move from the 152.70 area, or four-week lows, instead met with fresh supply on Tuesday. This marked the third day of a negative move in the previous four and was sponsored by a strong revival in demand for the safe-haven Japanese yen.

Investors turned cautious amid speculations that the rising inflationary pressures could force central banks to hike rates earlier than expected. Against the backdrop of the recent runup to record highs, the nervousness prompted some profit-taking in the equity markets and benefitted traditional safe-haven assets.

Bearish traders further took cues from the ongoing decline in the government bond yields. However, the prevalent US dollar selling bias extended some support to the British pound and helped limit any deeper losses for the GBP/JPY cross. That said, the near-term bias seems tilted in favour of bearish traders.

Last week, the Bank of England surprised investors and took a dovish turn to hold interest rates steady. This comes on the back of worries that the UK government will trigger Article 16 of the Northern Ireland Protocol, which should act as a headwind for the British pound and cap the GBP/JPY cross.

In the absence of any major market-moving economic releases on Tuesday, the fundamental backdrop warrants some caution before positioning for any meaningful recovery. That said, it will still be prudent to wait for sustained weakness below the 153.00 mark to confirm the bearish outlook for the GBP/JPY cross.

Technical levels to watch