GBP/JPY consolidates near-156.50 in quiet trade as heavy UK data slate, BoJ policy meeting eyed

• GBP/JPY is consolidating near-156.50 in quiet trade as focus turns to a heavy slate of UK data and the BoJ meeting.
• The pair is also likely to continue to trade as a proxy of global risk appetite this week.

After last Friday’s brief dip below support at the 156.00 level and test of the 155.50 mark, the pair has recovered back to trade in the 156.50 area for most of Monday’s session, up about 0.2% on the day. FX volumes were thinner than usual on Monday given the closure of US markets for MLK Day, making for unusually flat trading conditions. Monday’s modest recovery back above 156.00 sets up the possibility that the pair may be able to this week recover back to test recent highs in the 157.70 area, thus keeping alive GBP/JPY’s bull run that has seen its rally more than 5.0% from its early December near-149.00 lows.

Much of this rally depended upon a sharp improvement in global risk appetite in the final weeks of December as Omicron fears subsided and markets became more confident the BoE’s surprise December rate hike would be followed by more in 2022. But central bank tightening fears (primarily relating to the Fed) have knocked the wind out of US and global equities at the start of 2022, helping support the yen and pull GBP/JPY back from recent highs. GBP/JPY may well continue to track the fortunes of equity markets this week as a proxy for risk appetite.

A heavy slate of UK data, including the latest jobs report on Tuesday, inflation numbers on Wednesday and latest retail sales figures on Friday might provide some upside risk to sterling if strong enough to support BoE rate hike expectations. Traders should also be on notice for what could turn out to be an unusually interesting BoJ meeting on Tuesday, after sources recently hinted that members at the bank are already mulling how the bank might withdraw stimulus in the coming years, even prior to inflation returning to the BoJ’s 2.0% target. Any chatter on this front could pump rate hike expectations for 2023 or beyond and could put some upwards pressure on Japanese yields, though the BoJ’s Yield Curve Control should keep volatility under wraps. Nonetheless, a hawkish BoJ meeting would offer the yen support and will be worth watching.