GBP/JPY flat-lines around 184.25 area, divergent BoJ-BoE policy stance to limit downside

• GBP/JPY attracts some intraday sellers on Monday and stalls its modest bounce from a two-week low.
• Looming recession risks lend some support to the safe-haven JPY and act as a headwind for the cross.
• The divergent BoJ-BoE policy stance could limit the downside and warrants caution for bearish traders.

The GBP/JPY cross gains some positive traction for the second successive day and recovers further from over a two-week low, around the 183.35 region touched on Friday. Spot prices, however, struggle to capitalize on the modest intraday move up and trade around the 184.25 zone, nearly unchanged for the day during the early part of the European session on Monday.

The Japanese Yen (JPY) continues with its relative underperformance in the wake of the divergent policy stance adopted by the Bank of Japan (BoJ) and other major central banks, which, in turn, acts as a tailwind for the GBP/JPY cross. In fact, the BoJ is the only central bank in the world to maintain negative rates and is expected to stick to its ultra-easy monetary policy settings. The bets were reaffirmed by BoJ Governor Kazuo Ueda's remarks at the Jackson Hole Symposium on Sunday, saying that the underlying inflation in Japan remains a bit below the 2% target.

In contrast, the Bank of England (BoE) Deputy Governor Ben Broadbent, speaking at the same event on Saturday, said that policy rates may well have to remain in restrictive territory for some time as the knock-on effects of the surge in prices were unlikely to fade away rapidly. This, in turn, offers some support to the British Pound (GBP). Apart from this, the risk-on impulse, bolstered by new measures rolled out by China to draw investors back into its battered stock markets, further undermines the JPY's safe-haven demand and offers additional support to the GBP/JPY cross.

That said, growing acceptance that the BoE will pause its rate-hiking cycle after the widely anticipated 25 bps lift-off at the September meeting holds back traders from placing aggressive bullish bets around the GBP. This, along with worries about a deeper global economic downturn, helps limit losses for the JPY and caps the upside for the GBP/JPY cross. In the absence of any relevant economic data on Monday, the fundamental backdrop makes it prudent to wait for strong follow-through buying before confirming that the recent pullback from a multi-year peak has run its course.

Technical levels to watch