• GBP/JPY gained strong follow-through traction on Tuesday and jumped to a fresh multi-year peak.
• The BoJ’s ultra-dovish stance continued undermining the JPY and remained supportive of the move.
• Stronger USD weighed on sterling and capped the upside amid extremely overbought conditions.

The GBP/JPY cross trimmed a part of its strong intraday gains to the multi-year peak and retreated to mid-166.00s during the early European session.

The unprecedented fall in the Japanese yen remained unabated through the first half of trading on Tuesday amid expectations that the Bank of Japan will retain its ultra-loose policy stance. Moreover, the BoJ has repeatedly said that it remains ready to use powerful tools to avoid long-term interest rates from rising too much. It is worth recalling that the Japanese central bank last month offered to buy unlimited 10-year Japanese government bonds to defend the 0.25% yield cap. This, in turn, was seen as a key factor that assisted the GBP/JPY cross to prolong its recent bullish trajectory and gain follow-through traction for the third successive day on Tuesday.

The momentum pushed spot prices to the highest level since February 2016, though stalled ahead of the 167.00 round-figure mark. Expectations for more aggressive Fed rate hikes continued boosting the US dollar. This, in turn, exerted some downward pressure on the British pound and kept a lid on any further gains for the GBP/JPY cross. Traders also seemed reluctant to place fresh bullish bets amid extremely overbought conditions and absent relevant market moving economic releases. That said, the bias remains tilted firmly in favour of bulls, suggesting that any meaningful pullback might still be seen as a buying opportunity and is more likely to remain limited.

Even from a technical perspective, the overnight sustained move beyond the previous YTD high, around the 164.65 region, adds credence to the near-term positive outlook. Some follow-through buying beyond the 167.00 mark will reaffirm the bullish bias and set the stage for a further near-term appreciating move for the GBP/JPY cross.

Technical levels to watch