GBP/JPY moves towards cycle highs amid labour market data from the UK

• GBP/JPY soared to a fresh cycle high, rising to a daily high of 176.80, last seen in January 2016.
• Hot labor-market figures from the UK fuel hawkish BoE bets. 
• Rising UK yields favour the Sterling.

On Tuesday, the GBP/JPY rose to a new cycle high of 176.72, gaining more than 1.20% as hot labour-market data from the UK fueled a rally of the British bond yields as markets expect a more hawkish stance by the Bank of England (BoE). On the other hand, the Yen weakened against most of its European rivals as policy divergence weighs on the Japanese currency.

Hot labour-market figures from the UK made British yields rally

The UK Office for National Statistics revealed that the number of those claiming jobless benefits contracted by 9.6K in May from its previous measure of 46.7 K. Moreover, the unemployment rate slightly decreased to 3.8% vs the 4% expected in the 3 months prior to April, while average earnings, including and excluding bonuses, accelerated during the same period. In that sense, falling unemployment and accelerating wage inflation fueled hawkish bets for the BoE and provided a boost in the arm for Sterling. 

That being said, Governor Andrew Bailey stated on Tuesday that “The labor hoarding is going on because of the tight market, and firms are reluctant to make people redundant.” Regarding inflation, “Food inflation is taking a lot longer to come down than we expected,” and he expects inflation to come down but that it may take longer than anticipated.

Regarding the next meetings: WIRP suggests a 25 bp hike is fully priced in, with nearly 15% odds of a larger 50 bps move.  Hikes are priced in for August, September, and November, which would see the policy rate peak near 5.5%. In that sense, the hawkish bets were reflected in rising UK yields. The 10-year bond yield rises to 4.47%, while the 2-year yield stands at 4.93% and the 5-year yield at 4.56%, all three seeing increases of from 2% to 4%.

GBP/JPY Levels to watch

Technically speaking, the GBP/JPY maintains a bullish outlook for the short term, but indicators reached overbought conditions suggesting that a downward technical correction may be on the horizon as the cross trades in multi-year highs since mid-May. The Relative Strength Index (RSI) rose above 70.00 (overbought), and the Moving Average Convergence Divergence (MACD) stands in positive territory.

If the GBP/JPY clears the 176.80 area, the pair could see a more pronounced move towards the psychological mark at 177.00 and the 177.50 zone. On the other hand, in case the cross corrects to the downside, support levels line up at the 174.50 area and below the psychological mark at 174.00, at the 20-day Simple Moving Average (SMA) at 173.40.

GBP/JPY Daily chart