GBP/JPY surges above 157.00, targets yearly highs around 158.00

• GBP/JPY advanced above 157.00 on Monday despite a risk-off sentiment in the market and is targeting yearly highs near 158.00.
• The pair was buoyed by a rise in UK yields along with its global peers.
• With dovish comments from Bank of England Bailey expected later this week and fragile risk appetite, further upside potential may be more limited.

The weakness of the policy announcement of the GBP/JPY Post-BoE dovish last Thursday is now in the rear view mirror, with the pair confidently pushing above 157.00 and targeting a test of yearly highs around 158.00. Monday was a risk-off session, with US stocks falling as energy prices rose sharply, keeping inflation fears alive, while aggressive comments from Fed Chairman Powell , fueled fears about the pace of US monetary policy tightening. That could normally weigh on GBP/JPY, but another key feature of Monday’s trade was a big rally in global bond yields (ex-Japan ), led by an upward move in US yields.

The fact that UK yields rose by more than 10 bps across the curve has contributed to a significant widening of UK-Japan rate spreads, encouraging flows between the yen and the pound sterling. After breaking above all of its major moving averages in the past few weeks, GBP/JPY still looks very likely to test yearly highs around 158.00.

But traders would do well not to count on rising UK yields pushing the pair even higher as, for example, has been the case with US and USD/JPY yields of late. While this week’s UK consumer price inflation data released on Wednesday could be further encouraged, BoE Governor Andrew Bailey is likely to later remind markets that only “modest” could be likely further adjustment. In fact, the BoE seemed much more concerned about growth risks and the impact on real incomes in the coming months than containing inflation.

In the context of a BoE likely to outperform market tightening expectations, the outlook for a sustained break above 158.00 in the near term is not very good. Not unless there is a massive surge in risk appetite (ie global stocks claw back ground like they did last week). Amid seemingly stalled progress in Russia-Ukraine peace talks and a Western coalition likely to continue tightening sanctions on Russia (there is now talk of an EU embargo on Russian oil), in addition to growing fears of recession as the Fed warns of a more rapid tightening ahead, the outlook for a continued rebound in risk appetite is not good.

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