GBP/JPY RETREATS FURTHER FROM MULTI-YEAR PEAK, DROPS BACK CLOSER TO 167.00 MARK

• GBP/JPY corrected sharply from a fresh multi-year peak touched earlier this Thursday.
• A generally weaker risk tone benefitted the safe-haven JPY and prompted profit-taking.
• The UK political jitters undermined the GBP and contributed to the retracement slide.

The GBP/JPY cross witnessed an intraday turnaround from its highest level since February 2016 touched earlier this Thursday and snapped a nine-day winning streak. The retracement slide dragged spot prices to a fresh daily low, around the 167.20 region during the early European session.

Concerns that a more aggressive move by major central banks to constrain surging inflation could pose challenges to the global economic growth continued weighing on investors’ sentiment. This was evident from a generally weaker tone around the equity markets, which extended some support to the safe-haven Japanese yen and prompted some profit-taking around the GBP/JPY cross.

On the other hand, the British pound was undermined by the UK political turmoil and modest US dollar strength. British Prime Minister Boris Johnson survived the no-confidence vote on Monday, albeit by a smaller margin. Given that many MPs from within the Conservative Party voted against him, the development has raised uncertainty over Johnson’s future as the UK Prime Minister.

Despite the combination of negative factors, the downside seems limited amid a big divergence in the monetary policy stance adopted by the Bank of Japan and other major central banks. In fact, BoJ Governor Haruhiko Kuroda reiterated on Wednesday that the central bank must continue its support for the economic activity by keeping its existing ultra-loose policy settings.

Adding to this, the Japanese central bank has promised to conduct unlimited bond purchase operations to defend its near-zero target for 10-year yields. This, in turn, supports prospects for the emergence of some dip-buying around the GBP/JPY cross, warranting caution for aggressive bearish traders and confirming that a multi-week-old bullish trend has run its course.