GBP/JPY retreats from cycle highs and stabilizes around 174.50

• In the Monday session, GBP/JPY traded in the 174.36 – 175.77 range, marking a new cycle high.
• Rising US yields and weak Japanese data weigh on the Yen.
• British labor market data will be released on Tuesday.

The GBP/JPY pair reached a fresh cycle high at 175.77 and then turned back into negative territory finding support at the 174.50 area. In this regard, rising US bond yields and dovish bets on Friday’s Bank of Japan decision put further pressure on the Yen. Markets are awaiting UK labor market data on Tuesday and US inflation.

British labor market data will determine the Bank of England’s next decision

For Tuesday’s session, UK labor market data is expected to show the number of people claiming unemployment benefits fell by 9,600 in May, down from a previous figure of 46,700. The unemployment rate is expected to rise slightly to 4%, while average earnings, both including and excluding bonuses, are expected to accelerate over the same period. Since central banks tend to apply a “full employment” policy, policy makers closely monitor the health of the labor market and therefore condition expectations for their decisions.

That said, Jonathan Haskel of the Bank of England (BoE) highlighted the importance of closely monitoring the momentum and persistence of inflation, signaling the possibility of further interest rate hikes to counter inflationary risks. In addition, Catherine Mann showed her concern on Monday about the rigidity of the core inflation figures and added that she is waiting for an “analysis of the data” to decide the next vote. In this sense, the BOE’s hawkish stance provides traction for the British pound.

On the other hand, the Japanese PPI contracted 0.7%m/m in May, beating the expected decline of 0.2%, while machine tool orders saw a substantial contraction of 22%. These weak economic data and slowing inflation have raised expectations of a more dovish stance from Governor Ueda and policymakers, indicating a preference for accommodative monetary policies. WIRP suggests a less than 10% chance of a policy hike for Friday’s BOJ meeting, with the odds rising to 55% in December.

GBP/JPY Levels to Watch

Based on the daily chart, GBP/JPY maintains a neutral to bullish outlook in the short term, as the bulls appear to have backed down after being rejected in the overbought zone. However, technical indicators remain positive, indicating that the market may be preparing for another leg higher.

If GBP/JPY manages to rally, the next resistances to watch are at the 175.75 daily high, followed by the 176.00 zone and the 176.50 zone. On the other hand, if the cross loses ground, immediate support levels are seen at the 174.45 area, followed by the 174.00 zone and the 20-day SMA at 173.10.

GBP/JPY Daily Chart