GBP/JPY retreats from YTD peak as surging UK bond yields weigh on GBP

• GBP/JPY struggles to capitalize on its intraday gains back closer to the year-to-date peak.
• A sharp rise in the long-dated UK bonds weighs heavily on the GBP and the currency pair.
• The BoJ uncertainty continues to undermine the JPY and should limit losses for spot prices.

The GBP/JPY cross retreats sharply from the 200.25 region or the vicinity of its highest level since July 2024 amid the emergence of heavy selling around the British Pound (GBP) during the early European session on Tuesday. Spot prices, however, manage to retain the positive bias and currently trade just above mid-199.00s.

The yield on long-dated UK bonds rose to the highest since 1998, putting further pressure on Prime Minister Keir Starmer's government to take steps to regain the confidence of markets. Apart from this, a modest US Dollar (USD) recovery overshadows the Bank of England's (BoE) cautious rate cut last month and contributes to the Sterling Pound's (GBP) underperformance. This turns out to be a key factor that fails to assist the GBP/JPY cross to capitalize on its intraday gains.

Meanwhile, the uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ) is seen weighing on the Japanese Yen (JPY). Apart from this, a stable performance around the equity markets contributes to the heavily offered tone around the safe-haven JPY and assists the GBP/JPY cross to stick to its positive bias for the second straight day. This, in turn, warrants some caution before confirming that spot prices have topped out and positioning for deeper losses.

There isn't any relevant market moving economic data due for release from the UK on Tuesday, leaving the GBP at the mercy of the price action in bond markets. Meanwhile, the market focus will remain glued to BoE's Monetary Policy Report Hearings on Wednesday, which will play a key role in providing some meaningful impetus and influencing the near-term GBP/JPY price dynamics.