GBP/JPY rallies to three-week high, eyes 183.00 mark amid broad-based JPY weakness

• GBP/JPY adds to Friday’s strong move up and scales higher for the second straight day.
• The BoJ’s unscheduled bond-buying operation weighs on the JPY and extends support.
• The divergent BoJ-BoE policy stance supports prospects for a further appreciating move.

The GBP/JPY cross gains strong follow-through traction for the second successive day on Monday and jumps to a three-week high during the early part of the European session. Spot prices currently trade around the 182.80-182.85 region, summing up to a rally of over 650 pips from the lowest level since June 13 touched on Friday, and remain well supported by the heavily offered tone surrounding the Japanese Yen (JPY).

In fact, the JPY is among the worst-performing G-10 currency and is pressured by the Bank of Japan's unscheduled operation on Monday to buy ¥300 billion ($2 billion) worth of Japanese government bonds (JGB). This is the first such move since February 2022 and follows the recent sharp rise in the yield of benchmark 10-year JGB to a nine-year high, led by the BoJ's decision to be more flexible in its Yield Curve Control (YCC) policy on Friday. It is worth recalling that the Japanese central bank said that the 0.5% cap for the 10-year Japanese government bond yield (JGB) will now be "references" rather than "rigid limits".

The initial market reaction, however, turned out to be short-lived as investors seem disappointed by the BoJ Governor Kazuo Ueda's dovish remarks, reiterating the need to maintain monetary support. Speaking at the post-meeting press conference, Ueda added that the central bank won't hesitate to ease policy further and that more time was needed to sustainably achieve the 2% inflation target. This, along with the underlying bullish sentiment across the global equity markets, undermines the safe-haven JPY and turns out to be a key factor that continues to provide a strong boost to the GBP/JPY cross.

Investors continue to cheer the latest optimism over more stimulus measures from China, which helps offset data showing that business activity in the world's second-largest economy deteriorated further in July. Apart from this, growing acceptance that the Federal Reserve (Fed) is nearing the end of its fastest interest rate hiking cycle since the 1980s remains supportive of the risk-on environment. Apart from this, bets for more interest rate hike by the Bank of England (BoE) turns out to be another factor behind the British Pound's relative outperformance and continues to push the GBP/JPY cross higher.

In fact, the UK central bank is widely expected to raise its benchmark interest rate by 25 bps on August 3, to 5.25%, or the highest since early 2008. Moreover, the markets have been pricing in two more BoE rate hikes by the end of this year as price pressures persist. This marks a big divergence in comparison to the BoJ's dovish stance and suggests that the path of least resistance for the GBP/JPY cross is to the upside. Moreover, sustained strength and acceptance above mid-182.00s add credence to the positive outlook, supporting prospects for a further near-term appreciating move.

Technical levels to watch