GBP/JPY trades with negative bias below mid-180.00s, downside seems limited

• GBP/JPY drifts lower for the fourth straight day and is pressured by a combination of factors.
• The softer UK CPI undermines the GBP while reviving safe-haven demand benefits the JPY.
• The BoJ-BoE policy divergence warrants some caution before positioning for further losses.

The GBP/JPY cross struggles to capitalize on the previous day's goodish rebound of around 75-80 pips from the 179.80 area, or the weekly low and meets with a fresh supply during the Asian session on Thursday. Spot prices remain in negative territory for the fourth successive day and currently trade around the 180.30-180.35 region, down less than 0.20% for the day.

The British Pound (GBP) continues with its relative underperformance in the wake of softer UK consumer inflation data released on Wednesday, which ease pressure on the Bank of England (BoE) to hike interest rates more aggressively. Meanwhile, concerns over slowing economic growth in China, the worsening US-China ties and geopolitical tensions benefit the safe-haven Japanese Yen (JPY), which, in turn, is seen weighing on the GBP/JPY cross.

It is worth recalling that data released earlier this week showed that the economic growth in China decelerated substantially in the second quarter and Retail sales - a gauge of consumption - slowed sharply in June. Adding to this, China's ambassador to Washington said on Wednesday that China does not want a trade or tech war but will definitely respond if the US imposes more restrictions on imports of equipment to make advanced chips.

Furthermore, Russia's defence ministry declared that any ships heading to Ukraine's Black Sea ports would be viewed as potential carriers of military cargo and party to the conflict from Thursday. This, in turn, keeps a lid on the recent optimism in the markets and drives some haven flows towards the JPY. That said, dovish remarks by Bank of Japan (BoJ) Governor Kazuo Ueda might cap gains for the JPY and act as a tailwind for the GBP/JPY cross.

Speaking at a news conference after the G20 meeting in India, Ueda on Tuesday pushed back against speculations of a BoJ policy shift and signalled to maintain ultra-loose monetary policy for the time being. Ueda noted that there is still some distance to sustainably achieve the 2% inflation target. He further added that if the assumption is unchanged, the BoJ's overall narrative on the monetary policy will remain unchanged.

Moreover, the annualized UK CPI continue to run well above the BoE’s 2% target and supports prospects for further policy tightening. This makes it prudent to wait for strong follow-through selling around the GBP/JPY cross before positioning for the resumption of the recent corrective pullback from the 184.00 mark, or the highest level since December 2015 touched earlier this month.

Technical levels to watch