British Pound refreshes monthly high; looks to extend rally above 217.00 vs weak JPY

The GBP/JPY cross attracts some dip-buyers near the 216.20 area and touches a fresh monthly high during the early part of the European session on Monday. Spot prices currently trade just above the 217.00 mark and seem poised to appreciate further amid a broadly weaker Japanese Yen (JPY).

Despite expectations of faster interest rate hikes by the Bank of Japan (BoJ), borrowing costs in Japan remain significantly lower than in other major economies, including the UK. The resultant interest rate gap keeps the so-called carry trade active, which, along with concerns about Japan's worsening fiscal conditions, turns out to be another factor undermining the JPY.

Analysts at Danske Bank observe that “the pressure for further tightening from the Bank of Japan is mounting to support the yen,” reflecting growing concern over the currency’s persistent weakness. However, they caution that “with domestic price pressures still modest, the decision is not straight forward,” underscoring the policy dilemma facing the BoJ as it weighs currency support against a still-muted inflation backdrop.

Meanwhile, the market reaction to a rare joint currency intervention by the US and Japan proved to be short-lived as the market focus remains on broader central bank policy paths. Furthermore, worries that Japan's economy remains under significant strain due to the protracted Middle East conflict and resultant disruptions in the Strait of Hormuz favor JPY bears.

The British Pound (GBP), on the other hand, is weighed down by a modest US Dollar (USD) uptick and caps the GBP/JPY cross. Nevertheless, the aforementioned fundamental backdrop suggests that the path of least resistance for the GBP/JPY cross remains to the upside. Hence, any corrective pullback is more likely to be bought into and remain limited.