GBP/JPY – Poised for further declines to new lows?
James Chen February 22, 2016 10:35 PM
<p>The British pound plunged against other major currencies early on Monday as the prospect of a UK exit, or so-called “Brexit,” from the European Union […]</p>
The British pound plunged against other major currencies early on Monday as the prospect of a UK exit, or so-called “Brexit,” from the European Union came into focus. While the Brexit vote has been scheduled for a full four months from now, current speculation on this potentially historic event has placed additional pressure on both the euro as well as the UK’s already-embattled currency. London Mayor Boris Johnson’s comments over the weekend in support of Brexit further weighed on the pound.
As the GBP/USD currency pair initially broke down on this news to nearly a seven-year low, GBP/JPY dropped below its key 160.00 support level to establish a new two-year low, dipping below its most recent low just under 160.00 that was hit less than two weeks ago. This drop occurred despite the fact that a general “risk-on” market sentiment prevailed on Monday, which pushed up global equity markets and dragged down the safe haven Japanese yen.
Helping to boost equity markets and pressure the yen was another major market event on Monday – the surge in crude oil prices. This rise was prompted largely by an International Energy Agency report that projected US shale production to decrease substantially within the next two years. Despite this projection and continuing speculation over a possible OPEC output freeze, however, crude oil’s rampant oversupply situation remains an exceptionally challenging obstacle to a recovery in oil prices.
In short, Monday’s oil-driven rally in equity markets may potentially be more short-lived than many would hope. If this is indeed the case, recent volatility in the equity markets could well continue and the Japanese yen could benefit further, placing additional pressure on both USD/JPY and GBP/JPY. This could be the case even if the Bank of Japan decides at some point to intervene and limit yen appreciation.
Any such rise in the Japanese yen coupled with further downside for the British pound due to Brexit speculation as well as an increasingly dovish Bank of England, should weigh significantly on GBP/JPY, potentially continuing the strong downtrend that has been in place since mid-year last year. In the event of sustained trading below the noted 160.00 support level, the next major downside targets are at the 156.50 and then 154.00 support levels.
StoneX Financial Ltd (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.