GBP/JPY retreats from weekly top, slides to 183.70 area amid reviving JPY demand

• GBP/JPY meets with a fresh supply and snaps a two-day winning streak to the weekly high.
• Bets that the BoJ will drop its negative interest rate policy boost the JPY and exert pressure.
• Speculations that the BoE is nearing the end of its rate-hiking cycle contribute to the decline.

The GBP/JPY cross comes under some renewed selling pressure during the Asian session on Thursday and for now, seems to have snapped a two-day winning streak to the weekly high, around the 184.35-184.40 area touched the previous day. The cross drops to a fresh daily low, around the 183.70 area in the last hour and is pressured by a goodish pickup in demand for the Japanese Yen (JPY).

The recent sell-off in the Japanese government bonds (JGB), triggered by the possibility of an early end to the Bank of Japan's (BoJ) negative interest rate policy, turns out to be a key factor underpinning the JPY. In fact, the yield on the benchmark 10-year JGB rose to its highest level since January 2014 on Tuesday in reaction to BoJ Governor Kazuo Ueda's hawkish comments over the weekend. In an interview with Yomiuri newspaper, Ueda signalled that hiking interest rate is among the options available if the BoJ becomes confident that prices and wages will keep going up sustainably.

Apart from this, speculations that the Bank of England (BoE) is nearing the end of its rate-hiking cycle contribute to the British Pound's (GBP) relative underperformance and exert additional pressure on the GBP/JPY cross. The Office for National Statistics reported that Britain’s economy shrank at the quickest pace in seven months, by 0.5% in July, suggesting that the UK economy is losing momentum in the wake of a sharp rise in borrowing costs and reviving recession fears. This comes on top of signs that the UK labour market is cooling and reaffirms market expectations.

The aforementioned negative factors, to a larger extent, overshadow the disappointing Japanese macro data, which does little to lend any support to the GBP/JPY cross. In fact, the Cabinet Office reported that Japan's core machinery orders fell more than expected, by 1.1% in July, in the wake of sluggish global growth and a slowdown in China. This comes on the back of several other indicators over recent weeks, indicating soft demand overseas and at home, and points to a difficult period ahead for the world's third-largest economy.

The muted market reaction, however, suggests that the path of least resistance for the GBP/JPY cross is to the downside. Hence, a subsequent slide back towards the 183.00 round figure, en route to a one-month low around the 182.70-182.65 region, looks like a distinct possibility. In the absence of any relevant macro data from the UK, the ECB-infused volatility in the markets might provide some impetus to the cross and allow traders to grab short-term opportunities.

Technical levels to watch