GBP/JPY keeps afloat above lows but downside risk remains
James Chen January 26, 2016 2:28 AM
<p>At the recent height of global market volatility last week, the yen had been rising at a swift clip due to accelerating asset flows towards […]</p>
At the recent height of global market volatility last week, the yen had been rising at a swift clip due to accelerating asset flows towards the perceived safety of the Japanese currency.
At the same time, last week marked new long-term lows for the British pound against several other major currencies, including the euro, the US dollar, and the noted Japanese yen. Sterling had been dropping sharply within the past several weeks, partly due to speculation that the Bank of England’s intended rate hike might be postponed for significantly longer than expected as a result of low inflation and weak economic growth.
This combination of a volatility-driven surge for the yen along with a sinking pound prompted the GBP/JPY currency pair to plunge slightly below the 164.00 support level last week. This was its lowest level in nearly two years – since early February of 2014 – when GBP/JPY bounced off this same 164.00 support area.
The similar bounce off this level that occurred last week formed a “hammer candle,” or “pin bar,” pattern that generally gives an indication of intensified buying activity around oversold price levels, especially if it occurs near major support areas. After this pattern formed, GBP/JPY did indeed rebound in a relief rally as global stock markets stabilized late last week. That rebound reached a high above 170.00 before paring its gains.
Volatility in the equity markets returned on Monday, however, as global stock indices pulled back significantly from last week’s highs, along with another large drop in the price of crude oil.
Despite the noted hammer candle, jittery investors are still highly vulnerable to global market volatility, and the Japanese yen could continue to benefit further, pressuring currency pairs like GBP/JPY. Adding to this pressure is the steep downward spiral that the British pound has experienced and could continue to experience if the Bank of England remains as dovish as it has been recently.
Any re-breakdown below the 168.00 support level could once again target the noted 164.00 support. A further breakdown below 164.00 would then confirm a continuation of the current downtrend, with the next major target at the 160.00 psychological support level.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.