Market Analysis

GBPJPY: Hit by Brexit drama

Last week, the UK and European Union (EU) negotiators finally reached a compromise withdrawal agreement that included a backstop to avoid a hard Irish border, but with no programmed end date or mechanism for Britain to end the arrangement after the transition. However, PM May managed to secure majority Cabinet backing after a long meeting before the walls started to fall apart in Whitehall on Thursday with seven Government resignations, including Brexit Minister Raab himself. But the no-confidence motion has still not reached the 48 total needed for a vote, and May got a Friday incentive as 5 other high profile members of her team decided to stay and rallied behind her. Gove and Fox also urged support from Parliament for the draft deal to provide May with a lifeline pending leadership challenge developments.

The latest report on the United Kingdom consumer price index (CPI) came in unchanged at 2.4% year-on-year in October, the same as registered in September and missing analysts’ estimates of 2.5%. Prices slowed for transport and food but rose at a faster pace for housing and utilities, recreation and culture. The CPI is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as positive for the GBP, while a low reading is seen as negative.

The Bank of Japan (BoJ) kept the interest rate unchanged at -0.1% at its October meeting and maintained the target for the 10-year Japanese government bond yield at near 0%, as widely expected by market analysts. The central bank also revised down inflation forecasts again, announcing that the momentum in the direction of achieving the price stability target of 2% is not sufficiently firm despite years of massive monetary easing. Generally, if the BoJ is hawkish about the inflationary outlook of the economy and raises the interest rates it is regarded as positive for the JPY. On the other hand, if the BoJ has a dovish view on the Japanese economy and keeps the ongoing interest rate, or cuts the interest rate it is seen as negative.

Since the beginning of 2018 until last Friday close, the GBPJPY remains negative with a loss of almost 5.0% and since the start of November persists with a slight gain of 0.35%. Nonetheless, the week ended on the left foot with a loss of more than 1.5% and on the daily basis closed relative red with a minor loss of 0.16%. Furthermore, the currency pair made a phase change, shifting from a bullish to a distribution phase.

On the last Friday session, the currency pair tried to rise but found enough selling pressure near the 145.393 to erase all of its initial gains and closed near the low of the day, however, managed to close within Thursday range, which suggests being slightly on the bearish side of neutral.

The stochastic is showing a strong bearish momentum and crossed below the 50 midline.

In October, the GBPJPY designed the second leg of the rounded top and tested the neckline that gave support perfectly to the currency pair. The GBPJPY kick-started November with a rally that came very close to September and October high, roughly at 149.820 but failed to break above lacking enough bulls to carry on and even turned south toward the neckline. Now for the million-pound question, will the currency pair bounce back up at the neckline or will it break to the downside?


GBP/JPY Daily Candlestick Chart

GBP/JPY Daily Candlestick Chart 


Watch out this Week:

On Monday, November 19 at 03:30GMT (Sunday 22:00 PM ET) the Bank of Japan (BoJ) Governor Haruhiko Kuroda is scheduled to speak. As head of the BoJ, which sets short-term interest rates, he has a major influence on the value of the JPY. Traders watch his speeches closely as they are often used to drop hints regarding future monetary policy and interest rate shifts. His comments may determine a short-term positive or negative trend for the Japanese Yen.

On Tuesday, November 20 at 10:00GMT (5:00 AM ET) the Bank of England (BoE) Governor Mark Carney is to schedule speak. As head of the BoE’s Monetary Policy Committee (MPC), which controls short-term interest rates, Carney has more influence over the pound value than any other person does. Traders analyze his public engagements for clues regarding future monetary policy. His comments may stimulus a short-term positive or negative trend.

On Wednesday, November 21 at 10:00GMT (5:00 AM ET) the Statistics Bureau is scheduled to release the National Consumer Price Index (CPI) year-on-year in October which is expected drop to 1.2% from a 1.3% registered in the previous month. A higher than expected reading should be seen as positive for the JPY, while a lower than expected reading should be taken as negative.


Written by Hugo O’Neill, External Analyst


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