GBP/JPY jumps to the highest level since 2016, around 174.80 region

• GBP/JPY gains traction for the third straight day and hits a fresh multi-year peak on Friday.
• Bets for additional rate hikes by the BoE underpin the British Pound and remain supportive.
• A slight improvement in the risk sentiment weighs on the JPY and contributes to the move up.

The GBP/JPY cross is seen building on this week's goodish rebound from the 172.70-172.65 region and gaining traction for the third successive day on Friday. The momentum pushes spot prices to the 174.75-174.80 region, or the highest level since February 2016 during the Asian session.

The British Pound (GBP) continues with its relative outperformance on the back of firming expectations for more interest rate hikes by the Bank of England (BoE), which, in turn, acts as a tailwind for the GBP/JPY cross. In fact, the markets seem convinced that the BoE will be far more aggressive in policy tightening to contain stubbornly high inflation and anticipate another 25 bps lift-off on June 22.

The bets were lifted by the official data released last week, showing that the headline UK CPI fell less than expected in April and a closely watched measure of core price surged to a 31-year high. Adding to this, the Organisation for Economic Co-operation and Development (OECD) forecasted on Wednesday that inflation in Britain will be the highest among developed economies, at 6.9% in 2023.

Apart from this, a slight improvement in the global risk sentiment, along with a more dovish stance adopted by the Bank of Japan (BoJ), undermines the safe-haven Japanese Yen (JPY) and offers additional support to the GBP/JPY cross. That said, worries about a global economic slowdown, particularly in China, could cap the optimism, which should help limit losses for the JPY and keep a lid on the cross.

Furthermore, the prospects for more sizeable interventions by the BoJ could support the domestic currency and warrant some before placing aggressive bullish bets around the GBP/JPY cross. Nevertheless, spot prices remain on track to end in the green for the fourth successive week in the absence of any relevant market-moving economic releases on Friday.

Technical levels to watch