GBP/JPY touches fresh daily low near 182.00, downside seems limited ahead of BoE on Thursday

• GBP/JPY corrects sharply from a three-week high and is pressured by reviving safe-haven demand.
• The risk-off impulse provides a strong lift to the JPY and is seen as a key factor weighing on the cross.
• The BoJ-BoE policy divergence should limit losses ahead of the central bank event risk on Thursday.

The GBP/JPY cross comes under heavy selling pressure on Wednesday and snaps a three-day winning streak to over a three-week high, around the 183.25 region touched the previous day. The downward trajectory extends through the early part of the European session and drags spot prices to a fresh daily low, around the 182.00 mark in the last hour.

The global risk sentiment took a turn for the worst after Fitch unexpectedly downgraded the US Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'AA+' from 'AAA', citing fiscal deterioration over the next three years. This anti-risk flow forces investors to take refuge in traditional safe-haven currencies, which, in turn, benefits the Japanese Yen (JPY) and turns out to be a key factor weighing on the GBP/JPY cross.

Apart from this, the decline could further be attributed to some long-unwinding trade, especially after a strong rally of nearly 700 pips from the 176.30 area, or a six-week low touched last Friday. Any further decline, however, is more likely to remain limited, at least for the time being, in the wake of a big divergence in the monetary policy stance adopted by the Bank of Japan (BoJ) and the Bank of England (BoE).

In fact, BoJ Governor Kazuo Ueda reiterates last week that the central bank won't hesitate to ease policy further and that more time was needed to sustainably achieve the 2% inflation target. Adding to this, the minutes from the BoJ policy meeting released earlier today revealed that members agreed to maintain the current easy monetary policy. Furthermore, BoJ Deputy Governor Shinichi Uchida turned down talks of an early end to the negative rate policy and said that Japan is now at a phase where it's important to patiently maintain the ultra-easy policy.

In contrast, the BoE is widely expected to raise its benchmark interest rate by 25 bps at its upcoming monetary policy meeting on Thursday, 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, in turn, could act as a tailwind for the British Pound and might hold back traders from placing aggressive bearish bets around the GBP/JPY cross ahead of the key central bank event risk, warranting some caution before positioning for any further losses.

Technical levels to watch