GBP/JPY slides as Yen firms on risk aversion with Japan GDP in focus

• GBP/JPY weakens as risk-off flows lift the Japanese Yen despite upbeat UK GDP data.
• UK Q1 GDP beats forecasts, but BoE caution tempers Pound strength.
• Hawkish BoJ remarks and strong Japan PPI raise rate hike expectations ahead of GDP release.

GBP/JPY is under pressure on Thursday as safe-haven demand drives renewed strength in the Japanese Yen (JPY).

Despite stronger-than-expected United Kingdom (UK) GDP data, the British Pound (GBP) is struggling to gain traction amid growing risk aversion, driven by escalating geopolitical tensions, fading optimism around US-China trade negotiations, and divergent central bank signals.

At the time of writing, the pair is down 0.5% on the day at 193.70, with traders turning their focus to Japan's preliminary Q1 GDP report due at 23:50 GMT, which could reinforce or challenge the Bank of Japan's (BoJ) recent hawkish shift.

UK GDP surpasses expectations, but BoE warns of potential headwinds

The UK's Office for National Statistics (ONS) published its preliminary Gross Domestic Product (GDP) data for the first quarter on Thursday, revealing that the economy grew by 0.7% QoQ, beating the 0.6% consensus, registering the fastest pace of growth in a year.

However, despite the upside surprise in first-quarter growth, economists caution that the momentum may not be sustained. The Bank of England (BoE) remains measured in its outlook, maintaining a full-year GDP forecast of just 1.0%, as the economy faces headwinds from elevated interest rates, weaker global trade flows, and tighter fiscal conditions.

BoJ signals shift as inflation data supports hawkish tilt

On Tuesday, BoJ Deputy Governor Shinichi Uchida signaled a potential shift in the central bank's policy stance, telling parliament that "Japan's underlying inflation and medium- to long-term inflation expectations are likely to temporarily stagnate. But even during that period, wages are expected to continue rising as Japan's job market is very tight."

He added that companies are expected to pass rising labor and transportation costs to consumers, reinforcing inflationary pressures. These remarks suggest the BoJ is laying the groundwork for further rate hikes if economic conditions continue to align with its projections.

Japan's April Producer Price Index (PPI), released Wednesday, rose 4.0% YoY, further validating Uchida's comments and raising the likelihood of additional tightening. Markets are now awaiting Japan's preliminary GDP figures, with a 0.1% contraction forecast. 

Risk-off mood and Japan GDP in focus for GBP/JPY's next move

Global markets remain in a defensive posture amid lingering uncertainty over US-China trade negotiations and broader geopolitical tensions. This risk-off environment has fueled demand for traditional safe-haven assets like the Japanese Yen, adding pressure to GBP/JPY.

With Japan's GDP release now in focus, a stronger-than-expected figure could reinforce BoJ hawkishness and accelerate GBP/JPY losses, potentially driving the pair toward support at 190.00. Conversely, a downside surprise may offer short-lived relief for the Pound. Barring a clear BoJ pivot, the near-term bias in GBP/JPY remains tilted to the downside, shaped by risk sentiment and shifting monetary policy dynamics.