GBP/JPY Could Hit 6-Year Highs As BoJ Maintains Dovish Policy

Summary:

The maintenance of dovish policy by the Bank of Japan (BoJ) could send the GBP/JPY to 6-year highs if a critical resistance gives way.

The GBP/JPY is slightly higher this Thursday after the Bank of Japan maintained its ultra-dovish monetary policy as widely expected. The Bank of Japan (BoJ) left interest rates unchanged at -0.10% but cut growth estimates and raised its inflation outlook.

In the words of long-standing Bank of Japan Governor Haruhiko Kuroda, the Bank of Japan had no plans to change its 2% inflation target policy or to raise its long-term interest rate targets. However, Kuroda also said that the pace of wage increases is yet to keep pace with accelerating inflation. Therefore, he maintained that monetary easing was needed to ensure further wage growth in Japan, cementing the BoJ’s dovish stance on current inflationary trends.

The BoJ raised its forecast for consumer price inflation from 1.9% to 2.3% for FY2022 and from 1.1% to 1.4% for FY2023. However, the BoJ also cut the growth forecasts for 2022 from 2.9% to 2.4% and from 2.0% to 1.9% for 2023 and 2024. A note from research firm ING believes the forecasts are too optimistic amid growing recession fears.

Things are quiet from a fundamental perspective on the UK side of the equation, leaving the pair to react to the dovish stance of the BoJ as the sole fundamental trigger this Thursday. The GBP/JPY is up 0.22% as of writing as the potential for carry trade opportunities remains.

GBP/JPY Outlook

The pair is set to challenge the resistance at 166.243 (29 June and 20 July 2022 highs). A break of this level brings in 168.376 (20 April and 8 June highs) as an additional price target to the north. Clearance of this top continues the uptrend, with the 8 February 2016 top at 170.721 as the next upside target. Attainment of this point would mark a 6-year high for the GBP/JPY pair.

On the other hand, rejection at 166.243 allows the bears to challenge the support at 164.680 (23 June low). A further decline targets 162.121 (12 July low) before 159.988 (16 June low) and 157.768 (19 May low) form viable targets south of this pivot.