GBP/JPY clings to modest intraday gains above 185.00 mark, lacks bullish conviction

• GBP/JPY attracts some buying on Monday, albeit struggles to capitalize on the move.
• Intervention fears, along with a softer risk tone, lend support to the JPY and cap gains.
• The BoJ-BoE policy divergence favours bulls and should continue to limit the downside.

The GBP/JPY cross struggles to capitalize on its intraday rally of over 55 pips, though manages to hold above the 185.00 psychological mark through the early European session on Monday.

The Japanese Yen (JPY) weakens after reports indicated that the Bank of Japan (BoJ) will purchase an unlimited quantity of government bonds at a fixed rate with residual maturity of 5 years to 10 years. This, in turn, assists the GBP/JPY cross to attract some dip-buying on the first day of a new week. That said, fears of intervention by Japanese authorities, along with a generally weaker risk tone, limit losses for the safe-haven JPY and cap the upside for spot prices, at least for the time being.

Investors remain concerned about the worsening economic conditions in China. Adding to this, a smaller-than-expected rate cut by the People’s Bank of China (PBoC) signals limited policy support for the economy, despite worries about a deepening crisis in China's property sector, and further tempers investors' appetite for riskier assets. The near-term bias for the GBP/JPY cross, meanwhile, seems tilted in favour of bulls in the wake of a more dovish stance adopted by the BoJ.

In fact, the BoJ is the only central bank in the world to maintain negative interest rates. In contrast, the Bank of England (BoE) hiked its benchmark interest rate for the 14th time in a row, to a 15-year peak of 5.25% in August. Moreover, the markets have been pricing in a greater chance of a 25 bps lift-off at the September BoE meeting. The bets were lifted by the stronger UK wage growth data, which rose to a record high in the second quarter and added to worries about long-term inflation.

Adding to this, the upbeat UK GDP report and slightly higher-than-expected UK CPI print support prospects for a further policy tightening  by the BoE, suggesting that the path of least resistance for the GBP/JPY cross is to the upside. That said, a bearish divergence on the daily chart – with spot prices rising to a fresh multi-year peak last week, while the Relative Strength Index (RSI) hitting a lower high – warrants some caution before placing fresh bullish bets.

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