GBP/JPY bears ride the wave of divergent BOE, BOJ policy expectations

The Japanese yen was the strongest FX major on Thursday on hawkish BOJ bets, after NPJ member Tamura urged the central bank to raise rate to at least 1%. With rates currently at 0.5%, this plays with market pricing of two more cuts this year. Inflationary risks are building with companies set to raise wages further, and bets are on for the next hike to arrive as early as April.

The yen was broadly lower, sending USD/JPY below 152 and seeing it on track for its most bearish week in ten. And if NFP is to surprise to the downside, it could even test 150 ahead of the weekend if its current trajectory is to be maintained.

GBP/USD was the weakest major after a dovish 25bp cut from the BOE, taking rates to 4.5% from 4.75%. It was a unanimous decision with a 9-0 vote in favour of a cut, though some policy makers wanted more. Most notably, Catherine Mann – an MPC member recently opposed to cuts – voted for a 50bp cut alongside Swati Dhingra. So while BOE governor Bailey said he expects further easing and the bank will continue to make decisions “meeting by meeting”, pressure is clearly building for action to come sooner than later.

The divergent theme between the BOJ and BOE saw GBP/JPY lead the way lower on Thursday, dropping below 189 and hitting its lowest point since December. And there could be further for the cross to fall looking at price action clues on the weekly timeframe.

GBP/JPY technical analysis:

GBP/JPY fell hard during its five-week decline from the July high, followed by a 3-wave retracement towards 200. Bearish momentum has now realigned with that initial selloff and two lower highs have formed below 200. Now trading at the week’s lows and just pips above the December high, a break beneath it seems far more likely than not.

The September low around 184 low and August low around 180 make likely targets over the coming weeks for the cross, but if we see an all-out strengthening of the yen this year as I anticipate, 172 at a minimum seems feasible as it lands around a 100% projection, 200-week SMA and October 2022 high. But assuming we are in a 5-wave move lower, 160 sits jus beneath the 138.2% projection.

The daily chart shows prices holding above the December low and monthly S1 pivot and the RSI (2) is oversold. If GBP/JPY is kind enough to treat us to a bounce, it may be on the shallow side, and I suspect bears are simply waiting to reload for a bearish breakout towards the September low.

See my longer-term views on AUD/JPY and EUR/JPY

But what can be seen on GBP/JPY can also be applied across most yen pairs. If we take a step back to admire the view, it shows the yen is strengthening across the board, and this certainly plays into my bias of a much lower AUD/JPY and ERUR/JPY this year, alongside GBP/JPY.

To see CHF/JPY also falling shows that the yen is the weapon of choice for safe haven flows, alongside the fact that the SNB (Swiss National Bank) mentioned negative rates recently.

The lower high on AUD/JPY keeps a head and shoulders top alive, and the cross could trade as low as 76 should bears gun for the 138.2% Fibonacci ratio. CAD/JPY already appears to have breached the neckline of its own H&S top, which can bed a continuation pattern during a downtrend. I wouldn’t really call GBP/JPY a head and shoulders, but it is now beneath trend support and bearish momentum is clearly increasing after a series of lower highs. Price action on USD/JPY is the least bearish as its uptrend on the weekly chart remains intact, but even here is succumbing to yen strength. And so soon into the Chinese new year, it is beginning to look like year of the yen.

Economic events in focus (AEDT)

10:30 – JP household spending
10:50 – JP foreign reserves (USD)
16:00 – JP coincident, leading indicators
18:00 – DE industrial production
23:15 – BoE MPC member Pill speaks
00:30 – US nonfarm payrolls report
00:30 – CA employment report
02:00 – US consumer sentiment (Michigan University)
04:00 – FOMC Kugler speaks
05:00 – US GDPnow

View the full economic calendar

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.

StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.

In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.

StoneX Financial Pte. Ltd. is not under any obligation to update this report.

Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.

ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.

City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.

The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.

The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.

The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.

This advertisement has not been reviewed by the Monetary Authority of Singapore.