GBP/JPY Analysis: Slips Below 137 Amid Bearish Outlook for the UK Economy
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Key Takeaways:
- The pair falls short following Bank of England Governor remarks
- The UK is still facing key economic challenges
- No Brexit developments likely to lead to lighter volumes
The Sterling is trading lower today against its counterpart, the Japanese Yen. The major pair was able to reach a high of 137.42 in the early European trading session today only to fall short following the remarks made by Bank of England Governor Andrew Bailey.
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Brexit Affects Trading Patterns
In the initial moments of the speech by Governor Bailey, the pair reached its highest intraday level due to comments indicating high hopes for the realization of a mutually beneficial Brexit deal. On other issues, Mr. Bailey stated that he expects the second coronavirus wave to have a much more controlled and isolated impact on the economy compared to the chaos caused by the first wave in spring.
From a more negative perspective, he highlighted key economic challenges that the UK is currently facing, such as the need for additional financial support for small and medium businesses and the uncertainty related to near-future developments amid the potential for another round of restrictions. In contrast to previous measurements, Governor Bailey does not expect a nationwide lockdown in the UK.
The Sterling Is Hit Across Major Pairings
The effect on the GBP/JPY was somewhat strong to the downside as the pair dipped to a low of 136.67 and is currently hovering around 136.80. The Sterling was hit all across the board, as the GBP/USD is down from 1.2970 to currently trade at 1.2900 with a low of 1.2890. GBP/AUD, GBP/CAD, GBP/CHF, and the GBP/NZD are also in the red today.
The rejection at 137.40 painted a double top in the short-term for the GBP/JPY which just the other day reached a one-month high of 137.44. Bulls today were unsuccessful in their attempt to bring the pair higher. However, we should consider that in the current environment market participants tend to switch relatively easy between risk-on and risk-off strategies that create quick and unexpected swings in both directions.
No new developments are expected today in relation to the Brexit negotiations so we might expect lighter volumes and consolidation of the Sterling until fresh news brings volatility.
To take the long view, the GBP/JPY has been trading in an ascending channel ever since it bottomed out on Mar 18 trading at 124.02. Starting this uptrend, the highest reached so far is 142.67 on Sep 1. It’s interesting to observe that a potential head and shoulders pattern could be in formation if the exchange rate reaches the level of 139.68 followed by a retraction as this level could act as an inflection point.