GBP/JPY price analysis: Will the pair recover after bounce?
16:29, 14 December 2021
As of this writing, GBP/JPY was the worst performing G5 currency pair over the previous month, dropping 1.7%.
In the past weeks, concerns over the Covid-19 Omicron variant have slashed market expectations of an early Bank of England (BoE) interest rate hike, which had bolstered the pound's strength at the start of the quarter. As risk sentiment worsened, demand for safe haven currencies such as the Japanese yen increased accordingly.
From a fundamental point of view, price actions on GBP continue to be driven by the pandemic news flow, although the narrative could change this week ahead of tomorrow’s data on UK inflation in November and Thursday’s BoE meeting.
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GBP/JPY weekly chart
GBP/JPY fundamental analysis
Omicron worries and expectations of a BoE rate hike move were the main factors driving recent GBP/JPY performance.
The pound surged from 149 to 158 versus the Japanese yen in early October, as speculators anticipated a hawkish move by the Bank of England at its November meeting. However, they were disappointed when the central bank kept rates unchanged in a 7-2 vote. The pound has resumed its descent towards 149 since mid-November, fuelled by worries over the newly identified Omicron strain.
This week, the UK government issued a vaccine booster programme for all adults to be completed before the New Year, citing an imminent “tidal wave” of Omicron cases and upgrading the country's Covid alert level from 3 to 4.
On the data front, the UK economy continues to show a solid recovery in both labour market and inflation conditions. The unemployment rate in the UK fell to 4.2% in the three months to October 2021, the lowest level since June 2020, while the UK's annual inflation rate increased to 4.2% in October, the highest level since December 2011 and well above market expectations of 3.9%.
Tomorrow, the UK's November inflation numbers will be released, and the market forecasts the headline CPI to increase to 4.7%, while the core CPI – which excludes food and energy prices – is expected to climb to 3.7%.
The market is not anticipating a rate hike by the BoE on Thursday, but a higher-than-expected UK inflation reading could raise doubts over the BoE’s decision, possibly narrowing the gap between hawks and doves and moving the board towards a more hawkish stance in early 2022.
Going forward, any hawkish statements made by BoE members will enhance the pound, but if Omicron results in another increase in hospitalisations, the government may tighten restrictions further, harming economic activity and hence putting downward pressure on the pound.
GBP/JPY technical analysis
GBP/JPY has been trading in a range of 149–151 since the beginning of December, down 5% from October highs.
Already seven times in 2021, the pair touched the support line at 149, without materially breaching it and then rebounded.
On the daily chart, both the 50-day and 200-day simple moving averages (SMAs) are trading 2% and 1.4% above current levels, respectively.
After rebounding from the oversold position reached on 3 December, the 14-day relative strength index is presently holding around 42.
The next resistance level is at 151.20, and a breakout might improve the prospects of a rally towards the moving averages around 153-153.2.
For bulls of the GBP/JPY, a swift rebound is critical to avoiding the development of a “death-cross” as the 50-day SMA approaches the 200-day SMA from above. In such event, bears may return with new arguments for driving the pair lower.
The critical support level remains at 149, which may be retested if worries about Omicron deepen and the Bank of England continues to pushback against a rate hike.
GBP/JPY technical levels:
- 52-week high: 158.54
- 52-week low: 136.75
- 50-day moving average (one-day chart): 153.54
- 200-day moving average (one-day chart): 152.49
- 14-day Relative Strength Index (RSI) (one-day chart): 40
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