• GBP/JPY has extended on last Friday’s losses and is back to trading near two-week lows in the 163.00 area.
• Risk-off flows and an associated downturn in UK bond yields was the main factor driving the drop on Monday.
• The pair now trades more than 3.0% below last week’s peak above 168.00.

GBP/JPY was last trading lower by 1.1%, after extending on last Friday’s slightly larger loss to fall back to near the 163.00 level for the first time in nearly two weeks and, in doing so, drop below its 21-Day Moving Average (currently at 163.18) for the first time since mid-March. The latest move has been driven by a combination of risk-off flows hurting risk-sensitive sterling and benefiting the safe-haven yen and downside in UK bond yields, which reduces the UK’s rate advantage over Japan thus improving the yen’s relative investment appeal versus GBP.

At current levels in the 162.80s, the pair now trades more than 3.0% below last week’s multi-year highs above the 168.00 mark. According to technicians, the latest drop back under the 21-Day Moving Average opens the door to a pullback all the way to the 50DMA and key support in the form of early 2022 and late 2021 highs near-158.00, a further 3.0% drop from current levels.

The main fundamental catalyst behind the risk-averse start to the week that has weighed so heavily on GBP/JPY is the negative Covid-19 news coming out of China, a story that will be a key driver of sentiment in the coming weeks. Should further cities go into Shanghai style-lockdown, global growth forecasts will be further called into question and this could easily provoke further downside for GBP/JPY.

Aside from China lockdown risks, GBP/JPY traders will also be watching this week’s BoJ meeting, with the bank expected to reiterate its ultra-dovish stance. That could mean some downside risks for the yen. In terms of UK data and domestic themes, there isn't much to note. Discontent regarding the UK PM’s so-called “partygate” scandal continues to foment but doesn’t yet look likely to endanger his job.