What Is the Consensus on the GBP/JPY Currency Pair?
The GBP/JPY Currency Pair Has Weakened by 25.66% in 2016 with More Declines to Come
At the start of the year, the GBP/JPY currency pair was trading at 177.2852. The inexorable decline has continued virtually unchecked for the first seven months of the year. A sharp depreciation took place on the day of the Brexit decision, June 23, 2016. At the time the GBP/JPY currency pair was trading at 154.7711, and it dropped to 134.7486 by 28 June 2016. Weakness continued after a brief rally, and the pair found a new low of 130.35751 on the 11 July 2016. Since then, consolidation took place as quantitative easing measures were adopted in Japan – fiscal stimulus and QE in monetary policy.
There was also a brief honeymoon period for the GBP as market sentiment about a post-Brexit meltdown waned and the sterling had time to recover some of its losses. However, the recent Bank of England decision to cut interest rates by 25-basis points to its new level of 0.25% has hurt the GBP/JPY currency pair. Additionally, asset purchases to the value of an additional £60 billion and £10 billion in corporate bond purchases have raised overall asset purchases to £435 billion. This is all being done in an effort to stimulate economic growth in the United Kingdom, raise inflation closer towards the 2% target, and accelerate the velocity flow of money through the UK.
Projections for the GBP/JPY currency pair
Given the current trading range of 131 – 133, it appears as if the GBP/JPY pair could break beneath the key 132 level and hold there. Recall that the Japanese yen is one of the world’s safe haven currencies. This means that traders and investors are likely to include the JPY as part of their portfolio as a hedge against equity market weakness, volatility or geopolitical uncertainty. The UK economy lacks the bullish momentum that is required for traders of this currency pair. That is precisely why we have seen such a strong depreciation for the year-to-date.
In recent days we have seen traders going short on the USD, likely due to mixed economic data, increasing US stockpiles of crude oil, and weakness in energy markets. The US dollar index which tracks the value of the greenback against six other currencies is currently trading at 95.83, down 0.531 (0.55%) on Wednesday, 10 August. This indicates bearish sentiment about the greenback which typically fares well for the GBP. However, the overwhelmingly negative sentiment surrounding the GBP has overshadowed the loss of favourability for the greenback. Every time the GBP/JPY pair stages a recovery, traders are selling to take profit. This is perpetuating a long-term downtrend for the pair as can be seen from the above chart.
Now that the currency pair has broken below the key 132 support level, it looks likely to continue its downward descent towards 131.00. If that level is breached, we could see the GBP/JPY currency pair moving towards the 130.00 psychological level. This would also be a key technical level to watch in that it is a trend channel support level. If there is a recovery, resistance will be found around 132.75, perhaps 132.80, and that momentum could extend towards 134. However, we can expect strong resistance against this pair’s appreciation. The UK economy is simply under too much pressure to warrant any sustained appreciation in its currency.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.