GBP/JPY - Yield differential at 16-month high, still 132.00 remains elusive

• UK-Japan 2-year yield spread trades at 16-month high
• Still, GBP/JPY is struggling to regain the bid tone
• Focus on BOE's forward guidance

The GBP/JPY failed to cut through 132.00 levels yesterday and currently trades on the back foot around 151.20 levels despite the widening 2-year UK-Japan yield differential.

The two -year yield is more sensitive to short-term interest rate changes, thus, widening of the 2-year UK-Japan yield spread indicates the markets continue to price-in the BOE tightening cycle.

2-year yield spread

At the present time, the yield spread stands at 64.3 basis points (bps); its highest level since June 23, 2016. Still, the GBP/JPY cross is struggling to gather upside traction, with the 1-hour chart showing a potential head and shoulders pattern with the neckline support at 151.00 levels.

The Bank of England is widely expected to hike rates by 25 basis points. The yield spread may crash if Carney signals that the bank is not in a hurry to normalize the policy.

GBP/JPY Technical Levels

A break above 151.43 (resistance on 1-hour chart) would open up upside towards 152.00 (zero levels) and 152.27 (Sep. 25 high). On the other hand, a move below 150.87 (previous day's low) could yield a sell-off to 149.75 (Sep. 25 low) and 149.19 (Oct. 31 low).