GBP/JPY falls to two-month lows below 197.00 amid risk-off mood

• GBP/JPY attracts some sellers near 196.65 in Thursday’s early European session, down 1.0% on the day. 
• The combination of a risk-off mood and rising bets on the BoJ rate hike supports the JPY. 
• The BoE is anticipated to cut the bank rate to 5% at its August meeting next week. 

The GBP/JPY cross remains under selling pressure around 196.65 during the early European session on Thursday. The beginning of a risk-off mood leads to more safety flows in broader markets, including the Japanese Yen (JPY). 

S&P 500 futures were down 0.10% ahead of the European market open, while the Nikkei closed down more than 3%, marking its lowest level since late April. The risk-off environment has underpinned the safe-haven currency like the JPY and dragged the GBP/JPY cross lower to the lowest level since May 16. 

Furthermore, the growing speculation that the Bank of Japan (BoJ) would hike again at its monetary policy meeting next week forced short-sellers to close their positions, which lifted the JPY against its rivals. 

On the other hand, the Bank of England (BoE) is expected to cut the bank rate to 5% at its August meeting next week, the majority of economists said in a Reuters poll. This, in turn, exerts some selling pressure on the Pound Sterling (GBP). Traders are now pricing in a nearly 45% odds that the UK central bank will cut its policy rate to 5.0% next week. 

Data released on Wednesday showed that UK business activity expanded in July. The UK S&P Global Flash Composite Purchasing Managers’ Index (PMI) came in better than the market expectation, rising to 52.7 in July from 52.3 in June. Meanwhile, the Manufacturing PMI climbed to 51.8 in July from the previous reading of 50.9, the highest level in two years. The Services PMI expanded to 52.4 in the same report period versus 51.2, below the consensus of 52.5.