GBP/JPY rises despite weak UK economic data

• After five days of losses, the GBP/JPY managed to jump above 181.00 on Thursday.
• GDP in the UK contracted in May but was lower than expected.
• BoJ’s policy tweak expectations to limit the JPY’s losses.

The GBP/JPY gains ground despite weak economic figures from the UK. Investors continue to bet on an aggressive Bank of England (BoE), which limits the Pound’s losses, while the expectations of a pivot of the Bank of Japan (BoJ) support the Yen.

The Office for National Statistics (ONS) revealed that the UK's Gross Domestic Product (GDP) declined slower than expected in May at 0.1% MoM vs the expectations of 0.3%. The Manufacturing production saw similar results as they also contracted by 0.2% MoM in the same period but lower than the expectations of 0.5%. Finally, Industrial Production declined, but at a higher pace than expected at 0.6% vs 0.4% MoM in the same period.

The U.K. is undoubtedly moving towards a recession as the Bank of England tightens its monetary policy, and the economy weakens. In addition, the GDP has experienced a monthly contraction for the first time since March 2021.

Despite weak economic data, according to the World Interest Rate Probabilities (WIRP), the markets have already priced in a 50 basis points (bps) interest rate hike for August 3rd. However, the expectations have shifted for the subsequent hikes as a 25 bps increase is currently priced in for September 21st, as opposed to the initial projection of a 50 bps hike earlier in the week.

On the Japanese side, the JPY may limit its losses on the back of a Yield Control Curve (YCC) policy pivot by the Bank of Japan (BoJ). Masato Kanda, a currency diplomat from Japan, acknowledged that the prevailing deflationary trends "might be changing". Its worth noticing that rising wages may contribute to an increase in inflationary pressures, but the Bank shouldn’t disregard China’s economic situation, which is showing signs of weakness, as it could further weaken the local economy.

GBP/JPY Levels to watch

Despite indicators gaining ground, the short-term outlook favours the Yen over the GBP. The Relative Strength Index (RSI) shows strong downward momentum despite standing in positive territory. At the same time, the Moving Average Convergence Divergence (MACD) prints higher red bars indicating that the bears are in command.

Support Levels: 181.00, 180.50, 179.00.
Resistance Levels: 182.25 (20-day SMA), 182.50, 183.00.

GBP/JPY Daily chart