Ella 
The GBP/JPY cross traded lower after touching its highest level since November 2015 near 186.45 on Thursday, with a mildly negative bias in early European trade. However, the supportive background of fundamentals helps spot prices stay above the 186.00 mark, and supports the continuation of the recent breakthrough of the 184.00 integer mark (the previous annual peak).
Speculation that the recent weakness in the local currency could prompt some easing measures by Japanese authorities, or possible intervention in foreign exchange markets, combined with risk aversion, favored the safe-haven Japanese Yen (JPY). This in turn is seen as a key factor limiting the upside in GBP/JPY crosses. It is worth recalling that Japan’s top foreign exchange diplomat, Masato Kanda, said on Tuesday that he would take appropriate measures to prevent excessive currency volatility. At the same time, concerns about deteriorating economic conditions in China and fresh concerns about headwinds from rapidly rising borrowing costs have revived fears of a recession. That, in turn, has reduced investors’ appetite for riskier assets, prompting some safe-haven flows to the yen.
Still, a more dovish stance by the Bank of Japan (the only major central bank in the world to maintain negative interest rates) is likely to cap any meaningful gains in the yen. In addition, policymakers emphasized that the measures taken in July to make the Bank of Japan’s yield curve control (YCC) more flexible and allow the 10-year JGB yield to rise to 1% were only a technical adjustment aimed at Extending the validity of stimulus measures. That’s a sharp departure from the approach of other major central banks, including the Bank of England, which is expected to raise rates again at its next monetary policy meeting in September. The recent strengthening of UK macro data has reaffirmed this bet.
In fact, Tuesday’s UK jobs report showed that UK wages grew at a record pace in the second quarter, adding to concerns about longer-term inflation. Combined with last week’s upbeat UK GDP report and slightly higher-than-expected UK CPI data on Wednesday, the BoE should be able to continue tightening monetary policy. This is likely to continue to provide some support for the pound and suggest the least resistance to the upside in GBP/JPY crosses. As such, any subsequent corrective dip ahead of Friday’s UK retail sales figures could still be seen as a buying opportunity and is more likely to remain limited.
