GBP/JPY recovers from four-week low, eyes 210.50 on Iran de-escalation hopes

The GBP/JPY cross shows some resilience below the 100-day Simple Moving Average (SMA) for the second consecutive day and gains some positive traction on Wednesday. Spot prices climb back to mid-210.00s during the early European session and for now, seem to have snapped a four-day losing streak to a nearly four-week low, touched on Tuesday.

The global risk sentiment gets a strong boost following US President Donald Trump's remarks that the US military forces will be exiting the Iran war within two to three weeks. The optimism undermines demand for traditional safe-haven assets, which is seen as a key factor behind the Japanese Yen's (JPY) relative underperformance against its British counterpart and lends support to the GBP/JPY cross.

Meanwhile, reports that the UAE is pushing for military action to reopen the Strait of Hormuz raise the risk of broader regional escalation. Given that Japan depends mostly on oil imports from the Middle East, the ongoing Iran war continues to fuel worries that Japan’s economy will come under substantial strain in the near future. This further weighs on the JPY and acts as a tailwind for the GBP/JPY cross.

However, speculations that Japanese authorities would step in to stem further weakness in the domestic currency could help limit deeper JPY losses. Moreover, the Bank of England's (BoE) hawkish signal about a potential rate hike in April amid inflation fears stemming from Middle East conflicts raises downside risks to the economy. This could cap gains for the British Pound (GBP) and the GBP/JPY cross.

Hence, it will be prudent to wait for strong follow-through buying before confirming that the recent downfall from the 213.30 horizontal barrier has run its course and positioning for further gains. Traders now look forward to the release of the final UK Manufacturing PMI, which might influence the GBP price dynamics  and produce short-term opportunities around the GBP/JPY cross.