GBP/JPY consolidates around mid-183.00s, below multi-year peak ahead of UK GDP

• GBP/JPY lacks any firm directional bias and remains confined in a range on Friday.
• Traders seem reluctant and look to key UK macro releases before placing fresh bets.
• The divergent BoJ-BoE policy outlook continues to lend some support to the cross.

The GBP/JPY cross oscillates in a narrow trading band, around mid-183.00s through the Asian session on Friday and for now, seems to have stalled the overnight pullback from its highest level since December 2015.

Traders refrain from placing aggressive bets and prefer to wait on the sidelines ahead of the key UK macro released, including the Prelim Q2 GDP report against the backdrop of a bleak economic outlook. It is worth recalling that the National Institute of Economic and Social Research (NIESR) said earlier this week that it would take until the third quarter of 2024 for UK output to return to its pre-pandemic peak. In its quarterly update, the NIESR added that there was a 60% risk of the government going to the polls during a recession. This, in turn, is seen acting as a headwind for the British Pound and capping the GBP/JPY cross.

The downside, however, remains cushioned in the wake of a dovish stance adopted by the Bank of Japan (BoJ), which is the only central bank in the world to maintain a negative benchmark interest rate. Moreover, policymakers have stressed that the recent move to make the Yield Curve Control (YCC) policy more flexible, allowing yield on the 10-year Japanese government bond to move up toward 1%, was a technical tweak aimed at extending the shelf life of stimulus. Adding to this, weaker Japanese wage data released this week reaffirmed market bets that the BoJ will maintain ultra-low interest rates for the rest of the year.

This marks a big divergence in comparison to the Bank of England's (BoE) guidance, saying that the MPC will ensure that Bank Rate is sufficiently restrictive for long enough for the inflation to return to the central bank’s 2% target. It is worth recalling that the BoE raised its benchmark interest rate for the 14th time in a row, by 25 bps to a 15-year high of 5.25% in August. The BoE, however, called its current monetary policy stance "restrictive", suggesting that the tightening cycle may be nearing an end. Nevertheless, the GBP/JPY cross remains on track to register strong gains for the first time in the previous three weeks.

Technical levels to watch