The GBPJPY currency pair has been making notable strides this year, surging by a significant 6%. This upward momentum has been underscored by three consecutive weeks of gains, potentially extending to a fourth week. Driving this rally are several factors influencing both the British Pound and the Japanese Yen.
Primarily, the interest rate differential has been a key driver, with the Bank of England maintaining interest rates at 5.25%, far exceeding the ultraloose monetary policy of the Bank of Japan, which sits at -0.1%. The higher yields in the U.K. present more appealing opportunities for investors, potentially prompting capital inflows towards the U.K. and bolstering demand for the British Pound over the Japanese Yen.
However, despite these favourable conditions, challenges persist, with the fourth quarter GDP sliding by -0.3%. The U.K. economy recently entered a recession, facing back-to-back quarters of GDP contraction, which could dampen sentiments surrounding the British Pound. Similarly, Japan’s economy has also struggled, slipping into recession amid weak domestic demand, with low-interest rates further weighing on the Japanese Yen. While current macroeconomic conditions favour a buoyant British Pound against the Japanese Yen, the emergence of safe-haven demand could potentially support the Yen, posing a potential challenge to the pair’s continued upside momentum.
Technical
The GBPJPY currency pair has exhibited a strong uptrend, evident from its seven consecutive days of gains and its position above the 100-day moving average within an ascending channel pattern.
This positive trend has been further supported by a recent market interaction at the channel’s lower boundary, where demand surpassed supply, forming a support level at 189.152. However, the pair’s upward momentum faced a temporary setback as the RSI signalled overbought conditions, leading to a subsequent downturn and the formation of resistance at 191.309.
Currently, the pair has retraced to the 38.20% Fibonacci Retracement level, presenting a critical juncture for traders. If optimistic traders defend the pair from further downside moves, this could potentially trigger a reversal, paving the way for a retest of the 191.309 resistance level. Conversely, a high-volume breakdown below the 38.20% level could indicate intensified selling pressure, increasing the likelihood of a decline towards the 50% level.
Summary
In conclusion, the GBPJPY pair has shown remarkable resilience amid global economic challenges driven by interest rate differentials and market dynamics. While maintaining an uptrend, it faces resistance at 191.309, with potential support at 189.152.
Sources: Bank of England, Bank of Japan, Office for National Statistics, Cabinet Office Japan, Reuters, TradingView
Piece Written By Nkosilathi Dube, Trive Financial Market Analyst
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