• GBP/JPY dropped to a two-week low in reaction to the incoming negative Brexit headlines.
• The gloomy UK economic outlook further undermined the GBP and exerted some pressure.
• The risk-on impulse dented demand for the safe-haven JPY and helped limit further losses.

The GBP/JPY cross quickly recovered over 60 pips from a two-week low touched during the mid-European session and was last seen trading in neutral territory, around mid-160.00s.

The British pound weakened a bit in reaction to negative Brexit-related headlines, which, in turn, was seen as a key factor that exerted some downward pressure on the GBP/JPY cross. A spokesperson for UK Prime Minister Boris Johnson said that Northern Ireland Protocol (NIP) talks are in a serious situation. Britain reserves the right to take further action if solutions cannot be found urgently, the spokesman added further.

Separately, an EU official warned that the EU is ready to suspend its post-Brexit trade deal and might also halt talks regarding Gibraltar if the UK unilaterally revokes the NIP. This comes on the back of the Bank of England's gloomy economic outlook. Moreover, the UK economic think-tank - NIESR - noted that Britain is on course to enter a technical recession in the second half of 2022, which further weighed on sterling.

On the other hand, strong recovery in the global risk sentiment - as depicted by a generally positive tone around the equity markets - dented the Japanese yen's safe-haven status. Apart from this, the Bank of Japan's dovish monetary policy stance kept a lid on any meaningful gains for the JPY and assisted the GBP/JPY cross to rebound swiftly from sub-160.00 levels. The mixed fundamental backdrop warrants some caution for aggressive traders.

Technical levels to watch