GBP/JPY rebounds to mid-198.00s as JPY weakens on political uncertainty and risk-on mood

• GBP/JPY stages a goodish recovery from a nearly one-month trough touched on Thursday.
• A positive risk tone undermines the JPY amid political uncertainty and supports spot prices.
• Hawkish BoJ expectations could act as a tailwind for the JPY and cap the upside for the cross.

The GBP/JPY pair gains strong positive traction on Friday and now seems to have snapped a four-day losing streak to a nearly one-month low, around the 197.50-197.45 region, touched the previous day. The momentum lifts spot prices above mid-198.00s during the Asian session and is sponsored by a broadly weaker Japanese Yen (JPY).

Data released earlier today showed that the Unemployment Rate in Japan rose more-than-expected, to 2.6% in August. This, along with a generally positive risk tone, undermines the JPY's safe-haven status and prompts aggressive short-covering around the GBP/JPY cross ahead of Japan's Liberal Democratic Party (LDP) leadership election on Saturday, October 4th.

The new Prime Minister will influence the trajectory of Japan's fiscal policy, which could further determine the Bank of Japan's (BoJ) policy stance and drive the JPY. Traders have largely priced in Koizumi's victory. If Takaichi wins, it becomes a positive surprise, and the stock market could surge, said Kazuaki Shimada, Chief Strategist at IwaiCosmo Securities.

Meanwhile, BoJ Governor Kazuo Ueda said that the central bank must maintain an accommodative monetary environment to offset various uncertainties on Japan's economic outlook. Ueda, however, reiterated that the BoJ will raise interest rates if the economy and prices move in line with forecasts, keeping hopes alive for an imminent rate hike later this month.

Apart from this, concerns over the UK's fiscal outlook ahead of the Autumn budget in November might hold back traders from placing bullish bets around the British Pound (GBP) and cap the GBP/JPY cross. Hence, it will be prudent to wait for strong follow-through buying before confirming that a one-week-old corrective downfall has run its course.

Traders now look forward to the release of the final UK Services PMI for some impetus. Apart from this, the Bank of England (BoE) Governor Andrew Bailey's speech might influence the GBP price dynamics and contribute to producing short-term trading opportunities around the GBP/JPY cross, which remains on track to register heavy weekly losses.