• Despite the broadly risk-on market mood on Thursday, the dovish BoE rate hike prevented GBP/JPY from holding above 156.00.
• Amid rumblings of a Russo-Ukraine peace deal that could hit FX haven like the yen, this may not be enough to prevent GBP/JPY’s rally.
• The BoJ will be deciding on monetary policy during Friday’s Asia Pacific session.

Markets were in a risk-on mood on Thursday with global equities higher across the board, but this wasn’t enough for GBP/JPY. Indeed, the pair was last trading ever so slightly in the red just to the south of the 156.00 level, with sterling struggling to take advantage of risk-on flows in wake of Thursday’s more dovish thank expected BoE rate decision.

The central bank raised interest rates by 25bps as expected, but one of the nine rate-setters unexpectedly voted not to raise interest rates and the bank’s guidance on the prospect for future rate hikes was less hawkish than at its last meeting. Analysts interpreted the dovish hike as a negative for GBP, which, the reasoning goes, can no longer count on the tailwind of being backed by one of the more hawkish G10 central banks. Indeed, the Fed, though a few hikes behind the BoE in this hiking cycle, is looking much more hawkish right now.

Whether that will ultimately be enough to prevent GBP/JPY from advancing is another thing entirely. The BoJ, who decides on monetary policy in the coming hours, is nowhere near moving towards monetary tightening and G10/JPY currency pairs remain highly sensitive to G10/Japan rate differentials. That means if UK rates can maintain recent upside momentum, even if driven by rising inflation expectations, GBP/JPY stands a good chance at continuing to rally.

Though the reporting on the topic has been mixed and conflicting, there seems to be some momentum towards a Russo-Ukraine peace deal. If reached, that would hit JPY and likely give GBP/JPY, which has already rallied more than 3.0% versus earlier weekly lows, further tailwinds. Whether that would be enough to help the pair muster a break above annual highs in the 158.00 area is another thing entirely.