GBP/JPY surrenders modest gains to 199.00; downside remains cushioned amid weaker JPY

• GBP/JPY struggles to capitalize on modest intraday uptick, though the downside remains limited.
• The recent surge in long-dated UK bonds fuels fiscal concerns and is seen weighing on the GBP.
• Domestic political uncertainty and the BoJ's rate-hike plan undermine the JPY and support the cross.

The GBP/JPY cross attracts fresh sellers following an Asian session uptick to levels just above the 199.00 mark and retreats to the lower end of its daily range in the last hour. Spot prices currently trade around the 198.65 region, nearly unchanged for the day, and seem vulnerable to extend the previous day's sharp retracement slide from the vicinity of the year-to-date peak.

A surge in the UK 30-year gilt yield to the highest level since May 1998 fueled concerns about a widening budget deficit due to UK Chancellor Rachel Reeves' decision to increase borrowing in last year's budget. This overshadows the Bank of England's (BoE) cautious path of interest rate cuts due to persistent inflation worries and is seen as a key factor behind the British Pound's (GBP) relative underperformance. Apart from this, some follow-through US Dollar (USD) uptick undermines the GBP, which, in turn, might continue to act as a headwind for the GBP/JPY cross.

Meanwhile, the selling bias surrounding the Japanese Yen (JPY) remains unabated in the wake of heightened domestic political uncertainty and the lack of hawkish signals from the Bank of Japan (BoJ) Deputy Governor Ryozo Himino on Tuesday. In fact, Himino reiterated that the central bank should keep raising interest rates, though he warned that global economic uncertainty remains high. This seems to encourage speculators to continue building short JPY positions, which could offer some support to the GBP/JPY cross and help limit any meaningful depreciating move.

Traders now look forward to the release of the final UK Services PMI, which, along with a scheduled speech from BoE Deputy Governor Sarah Breeden, might influence the GBP. Apart from this, the JPY price dynamics might contribute to producing some meaningful trading opportunities around the GBP/JPY cross.