GBP/JPY bounces off multi-week low, still deep in the red just above 194.00

• GBP/JPY continues losing ground for the third straight day and drops to a multi-week low.
• Stronger wage growth data from Japan lifts BoJ rate hike bets and boosts the JPY demand.
• Stagflation fears continue to weigh on the GBP and further contribute to the ongoing slide.

The GBP/JPY cross attracts some follow-through sellers for the third successive day on Thursday and drops to over a three-week low, around the 193.70-193.65 region during the first half of the European session. Spot prices, however, manage to rebound a few pips in the last hour and currently trade around the 194.20 area, still down nearly 0.80% for the day.

The British Pound (GBP) continues with its relative underperformance in the wake of concerns about stagflation in the UK amid stubborn inflation and stalling growth. This, in turn, pushes the yield on the 10-year UK government bond to a new cycle high, which is expected to put additional pressure on growth. Adding to this doubts about the newly elected Labour government’s fiscal strategy, along with the Bank of England's (BoE) dovish split vote decision to leave rates unchanged in December exert pressure on the GBP. 

The Japanese Yen (JPY), on the other hand, strengthens in reaction to data released earlier this Thursday, which showed that base pay in Japan grew at the fastest pace in more than three decades. Furthermore, the inflation rate that the ministry uses for wage calculation accelerated from 2.6% in October to 3.4% from a year earlier. Adding to this, the broadening inflationary pressure backs the case for additional interest rate hikes by the Bank of Japan (BoJ). This, along with haven flows, benefits the JPY and weighs on the GBP/JPY cross. 

Investors, however, remain skeptical about the likely timing of when the BoJ will raise borrowing costs again. This, in turn, holds back the JPY bulls from placing aggressive bets and assists spot prices to rebound around 50-60 pips from the daily swing low. That said, the fundamental backdrop seems tilted in favor of bearish traders, suggesting that any subsequent recovery might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly.