GBP JPY consolidates losses after month long free fall

GBP/JPY on Wednesday has continued its recent consolidation just above key support around the 169.50 level, after having spent much of December and the beginning of January in an accelerated free fall.

The recent plunge has been due in part to heightened volatility in the equity markets that has fostered a risk-off environment pushing investors towards the perceived safety of the Japanese yen, as well as weak economic growth in the UK that could likely perpetuate a dovish Bank of England.

As the China-led volatility in global stocks during the beginning of the New Year has led to jittery investors propping up the yen, the Bank of England (BoE) is expected to take a dovish stance during Thursday’s Monetary Policy Summary, which could further weigh on an already heavy pound.

Indeed, the BoE is not expected to raise interest rates in the UK on Thursday, nor is it expected to provide any clear view of when a rate hike may actually occur. This dovish uncertainty is a far cry from the hawkish uncertainty that dominated Fed speculation in the latter part of 2015, which helped to strengthen the US dollar.

GBP/JPY’s most recent plunge that began in early December broke down below successively lower key support levels, including 180.50, 176.00, and 173.50. The beginning of this week saw the currency pair drop down to hit major support around the 169.50 level before entering into the current consolidation just above that support.

With a rather lackluster UK economy and uncertainty continuing to spook the equity markets, GBP/JPY could continue to follow the downtrend that has been in place for the past half year. Such a continuation may be triggered by a sustained breakdown below the current consolidation, around the noted 169.50 support level. In the event of this breakdown, the next major downside targets are at 168.00 and 164.00. In the absence of this breakdown, any rebound from current support should be met by key resistance around the noted 173.50 former support level.