Sterling remains one of the top-performing G10 currencies this quarter, while the Japanese yen struggles under the weight of stagnant macro data and an ultra-dovish central bank. With monetary divergence widening and risk appetite stable, GBP/JPY looks poised for continued upside. This article dissects the pair through fundamental, sentiment, and technical lenses to assess the sustainability of the current rally.

Fundamental Analysis

The UK economy is defying expectations. Q2 GDP growth accelerated to 0.7%, unemployment remains low at 4.6%, and inflation is elevated at 3.4%—well above the Bank of England’s 2% target. Both Manufacturing (50.1) and Services PMIs (51.3) point to continued expansion, and business confidence has rebounded into positive territory. These figures justify the BoE’s hawkish tone, and markets now price in a potential rate hike before year-end.

In stark contrast, Japan’s economy has stalled. Quarterly GDP was flat, inflation has cooled to 3.5% YoY and just 0.1% MoM, and business sentiment has turned negative. With the BoJ maintaining zero rates and reinforcing dovish guidance, monetary policy divergence remains a defining theme. The central bank’s reluctance to tighten, despite global normalisation, continues to undermine JPY valuation.

This macro gap is further illustrated in the current account and trade data. While the UK still runs a sizeable deficit, Japan’s surpluses no longer provide sufficient support as capital flows seek yield and return—areas where the UK remains attractive.

Sentiment Analysis

GBP is widely supported by institutional flows and speculative positioning. CFTC data shows increased long GBP exposure, and market commentary has shifted toward GBP as a high-carry, structurally strong currency in the current regime. BoE expectations remain data-dependent but lean hawkish.

The yen, meanwhile, continues to be viewed as a funding currency. With real yields deep in negative territory and BoJ policy firmly anchored, risk-on sentiment keeps JPY pressured. Unless global markets experience a sharp volatility spike, JPY demand is unlikely to return in the near term.

GBP/JPY also benefits from carry trade flows. With a BoE rate of 4.25% versus Japan’s zero-bound policy, yield-seeking capital continues to favour long GBP/JPY exposure, especially in a low-volatility environment.

Technical Analysis

GBP/JPY remains technically bullish on the daily chart:

• Ichimoku Cloud: Price is well above the cloud. The Tenkan-sen (196.41) and Kijun-sen (195.77) are aligned bullishly, while the Chikou Span confirms the trend. Leading Span A > B confirms a forward bullish bias.
• RSI: Currently at 54.11, retreating slightly from overbought conditions but still in bullish territory. No divergence signals.
• MACD: Bullish crossover is active with histogram momentum slightly waning but still above the zero line.
• Volume: Decreasing during the recent pullback, indicating weak selling pressure and a likely corrective dip within the broader uptrend.
• Price Action: The pair remains in a clear uptrend, forming higher highs and higher lows. The key support zone around 195.70–196.00 (Tenkan/Kijun cluster) is intact.

If the price holds above the 196.00 zone, the next upside target lies around 198.00 and potentially 200.00 if momentum accelerates.

Conclusion

GBP/JPY remains a fundamentally and technically strong long setup. With UK data surprising to the upside and the BoJ firmly dovish, the macro narrative strongly favours continued pound strength against the yen. Technicals align with this view, showing a healthy uptrend supported by momentum indicators and Ichimoku structure. While short-term pullbacks may occur, the broader trajectory remains bullish unless macro conditions shift drastically.

Verdict: Buy dips, maintain bullish bias. Monetary divergence is doing the heavy lifting—and it isn’t finished yet.