• A sharp rise in UK (and global) yields has hit the yen hard on Monday, with GBP/JPY subsequently rallying 1.0%.
• The pair has risen into the mid-163.00s despite risk-off flows being observed in other asset classes (equities).
• That’s because the higher yield environment plus more dovish BoJ commentary prevented the yen from benefitting from safe-haven flows.

Weaker than expected UK GDP figures for February, even though they may contribute to dissuading the BoE from raising interest rates as aggressively over the coming quarters, did not deter the GBP/JPY bulls on Monday. Indeed, as UK bond yields rode a wave of rising yields across major developed economies on the first day of the week, widening rate differentials have helped the pair lurch nearly 1.0% higher, where it now trades above 163.50.

That marks a more than 150 pip rally from last Friday’s closing levels at 162.00 and a nearly 200 pip rally from intra-day lows in the 161.60s. For reference, UK 10-year yields have rallied nearly 10 bps on Monday to hit 1.85%, their highest since January 2016, all while Japanese 10-year yields remain capped below the upper bounds of the BoJ’s -0.25% to 0.25% range.

Not helping the yen’s cause on Monday was dovish commentary from the BoJ to kick off the week, with the bank reiterating the need for its ultra-dovish policies to remain in place. Central bank/yield divergence has meant that the yen has been unable to benefit from safe-haven demand on Monday, even though global equities have been falling amid geopolitical/China lockdown woes.

Should the trend of higher yields across the globe continue this week, GBP/JPY stands a very good chance of testing and breaking above its March highs in the upper 164.00s. GBP/JPY traders will also have plenty of data to keep an eye on, including UK Consumer Price Inflation and labour market figures. These would likely play second fiddle to broader macro trends (such as rising yields).