Make or break time for GBP JPY bulls

The big “risk-off” trade over the last couple of weeks has taken a bite out of many markets, but perhaps no widely-followed instrument has been hit as hard as GBP/JPY. Just before Christmas week, the historically volatile pair was trading up around 183.00, at roughly the same level as it was exchanging hands back in late August.

Over the last three weeks though, the bottom has absolutely dropped out and GBP/JPY is trading nearly 1000 pips lower. More worryingly for GBP/JPY bulls, the exchange rate is now below previous support from Q1 2015 at 175.00, suggesting that a long-term top may have formed. Naturally, the question on all traders’ minds is “when will the selling stop?”

In short, pound won’t find a bottom until risk sentiment stabilizes and traders grow more optimistic about the prospects for the Bank of England raising interest rates. The first condition is straightforward: if and when traders grow more optimistic about the prospects for the global economy, they’ll feel more comfortable investing in the currencies of countries with hawkish central banks.

The second condition is the crux of the issue right now though. After a string of rather “meh” data from the UK, including a disappointing jobs report and yesterday’s weaker-than-anticipated Manufacturing PMI reading, many analysts expect the BOE to remain on hold until late this year, with some expecting no change until early 2017. While the BOE would typically follow in the Federal Reserve’s footsteps, the lackluster economic performance and fears over a possible “Brexit” (UK exit from the EU) vote later this year has the central bank exercising caution. For more on BOE policy and what it may mean for the pound, see my colleague James Chen’s note, “GBP/USD Potentially Targeting Long-Term Lows below Key Support.”

Turning our attention back to GBP/JPY, bulls can make a case for a near-term bounce with rates deeply oversold (the daily RSI indicator is below 15, its lowest reading in years). That said, the longer-term technical and fundamental trends seem to support fading any counter-trend rallies as long as rates remain below previous-support-turned-resistance at the 180.00 area. To the downside, psychological support at 170.00 could be in play if we don’t see a bounce this week.

Unless we see a sharp reversal at the 175 level, things seem likely to get worse before they get better for GBP/JPY bulls.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.