GBP/JPY fell to 194.45 in early trading on Thursday, falling for the third consecutive trading day. The escalation of the situation in the Middle East and the exposure of the United States considering launching a strike against Iran have triggered a rebound in risk aversion in the market, benefiting the yen's rebound. As a risky asset, the pound was under pressure due to the decline in risk aversion demand and policy uncertainty.

The Bank of England will announce its June interest rate decision later on Thursday, and the market is widely expected to keep the interest rate unchanged at 4.25%. According to the survey, most analysts interviewed predicted that the first interest rate cut would be in August, and there might be only one more cut to 3.75% before the end of the year.

"As tensions in the Middle East heighten global economic uncertainty, we expect the Bank of England to keep interest rates on hold and to cut rates only once this year." - Monica George Michail, associate economist at the National Institute of Economic and Social Research

Oil prices are already showing signs of rising. If the conflict intensifies, it may push up imported inflation in the UK, creating a dilemma for the central bank's policy and putting pressure on the pound.

The Bank of Japan maintains a dovish tone, limiting the yen's room for appreciation

Although risk aversion supports the yen, Bank of Japan Governor Kazuo Ueda said this week that he is more concerned about the downside risks to the economy, especially the potential drag on Japanese exports from US tariffs, suggesting that the Bank of Japan has no plans to raise interest rates for now. The dovish stance may limit the yen's further appreciation, making the GBP/JPY decline moderate.

"The Bank of Japan remains cautious about the economic outlook and the pace of interest rate hikes is expected to be delayed, which will help limit the downside of GBP/JPY." - Market analysis point of view

From the daily level, GBP/JPY has fallen for three consecutive days after falling from the high of 197.00 and is now hovering around 194.45. The price has closed below the 5-day moving average (about 195.20) and is approaching the 20-day moving average (about 194.00), indicating that short-term bearishness is dominant.

MACD fast and slow lines cross the zero axis and the green column expands, indicating that the momentum is bearish; RSI falls below 50 to around 45 and continues to fall, indicating that the downward momentum is still being released. If it effectively falls below 194.00 during the day, the exchange rate may test the support area of 193.80 or even 193.00;

On the contrary, if it rebounds to regain 195.20 and stands above 196.00, it is expected to challenge the high of 197.00 again. The overall pattern is bearish, and attention should be paid to the gains and losses of 194.00 to determine the continuation of the downtrend.

Editor's opinion:

The current trend of GBP/JPY is driven by the Bank of England's policy expectations and risk aversion. In the short term, if the situation in the Middle East deteriorates further, the safe-haven advantage of the yen may suppress the rebound of the pound.

If the Bank of England sends a dovish signal, the exchange rate may accelerate to the 193.00 area. However, given that the Bank of Japan's attitude is still cautious and the yen has limited room for appreciation, the medium-term decline of GBP/JPY may be limited. Pay close attention to the BoE statement and the wording of the governor's speech. If the dovish stance is combined with escalating geopolitical tensions, the short-term trend will still be bearish.