• GBP/JPY gains strong follow-through traction on Thursday and climbs to over a one-month top.
• The BoJ’s dovish stance, along with a positive risk tone, weigh on the JPY and remain supportive.
• The BoE’s hawkish guidance offset a bleak economic outlook and underpins the British Pound.

The GBP/JPY cross prolongs its upward trajectory witnessed since the beginning of the current week and climbs to over a one-month top during the early part of the European session on Thursday. Spot prices currently trade just above mid-183.00s and might now aim to retest the highest level since December 2015 touched last month.

A positive turnaround in the global risk sentiment – as depicted by a generally positive tone around the equity markets - is seen undermining the safe-haven Japanese Yen (JPY). Apart from this, a dovish stance adopted by the Bank of Japan (BoJ) continues to weigh on the JPY. This, along with a pickup in demand for the British Pound (GBP), provides a goodish lift to the GBP/JPY cross, taking along short-term trading stops near the 183.00 mark.

It is worth recalling that the BoJ decided in July to make its Yield Curve Control (YCC) policy flexible, though policymakers have stressed that the change was a technical tweak aimed at extending the accommodative policy. Furthermore, weaker Japanese wage data released earlier this week reaffirmed market expectations that the Japanese central bank will maintain its ultra-low/negative interest rates over the rest of the year.

Furthermore, the BoJ, in the Summary of Opinions from the July 28 meeting, said that it still has a significantly long way to go before revising its stance on the negative rate policy. This marks a big divergence in comparison to the Bank of England's (BoE) relatively more hawkish guidance, saying that the MPC will ensure that Bank Rate is sufficiently restrictive for long enough for the inflation to return to the central bank’s 2% target.

The aforementioned supportive factors help offset a bleak outlook for the UK economy and continue to push the GBP/JPY cross higher. In fact, the National Institute of Economic and Social Research (NIESR) said earlier this week that it would take until the third quarter of 2024 for UK output to return to its pre-pandemic peak. The NIESR further added that there was a 60% risk of the government going to the polls during a recession.

Hence, the market focus will remain glued to the preliminary release of the UK Q2 GDP report, which will be accompanied by other key macro releases on Friday. The data will play a key role in influencing the British Pound (GBP) and determine the next leg of a directional move for the GBP/JPY cross. The fundamental backdrop, meanwhile, favours bulls and suggests that the path of least resistance for spot prices remains to the upside.

Technical levels to watch