GBP/JPY Shows Limited Downside Below Mid-180.00s: Market Update- 20-07-2023.

GBP/JPY Analysis

Key Points: -

• The GBP/JPY pair continues its downward trend for the fourth consecutive day, facing pressure from various factors.
• The weaker UK Consumer Price Index (CPI) weighs on the British Pound (GBP), while the Japanese Yen (JPY) benefits from renewed safe-haven demand.
• The policy divergence between the Bank of Japan (BoJ) and the Bank of England (BoE) suggests the need for caution when considering further positioning for losses in the pair.

Today's Scenario: -

The GBP/JPY currency pair is facing challenges in capitalizing on the rebound it experienced the previous day, where it rose around 75-80 pips from the 179.80 area, which marked the weekly low. During the Asian session on Thursday, fresh selling pressure emerged, causing spot prices to remain in negative territory for the fourth consecutive day. The pair is currently trading around the 180.30-180.35 region, showing a decline of less than 0.20% for the day.

The British Pound (GBP) is underperforming relative to other currencies following the release of softer UK consumer inflation data on Wednesday. This has eased the pressure on the Bank of England (BoE) to adopt a more aggressive approach to interest rate hikes. On the other hand, concerns about China's slowing economic growth, deteriorating US-China relations, and geopolitical tensions are boosting the demand for the safe-haven Japanese Yen (JPY), thereby exerting downward pressure on the GBP/JPY cross.

Recent data showed a substantial deceleration in China's economic growth during the second quarter, and retail sales slowed sharply in June. Additionally, China's ambassador to Washington stated that China does not desire a trade or tech war but will respond if the US imposes further restrictions on imports of equipment for advanced chips.

Moreover, Russia's defense ministry declared that any ships heading to Ukraine's Black Sea ports would be considered potential carriers of military cargo and part of the conflict. This has dampened optimism in the markets and led to a flow of safe-haven investments towards the JPY. However, dovish remarks made by Bank of Japan (BoJ) Governor Kazuo Ueda might limit gains for the JPY and act as a tailwind for the GBP/JPY cross.

During a news conference after the G20 meeting in India, Ueda pushed back against speculation about a possible shift in BoJ policy and signaled the intention to maintain an ultra-loose monetary policy for the time being. Ueda emphasized that there is still some distance to achieve the 2% inflation target sustainably, and as long as this assumption remains unchanged, the BoJ's overall narrative on monetary policy will stay the same.

Furthermore, the annualized UK CPI remains well above the BoE's 2% target, supporting the possibility of further policy tightening. Therefore, it would be prudent to wait for strong follow-through selling in the GBP/JPY cross before considering a position for the resumption of the recent corrective pullback from the 184.00 level, which represents the highest level reached since December 2015, touched earlier this month.

Diagram of GBP/JPY: -

Economic Events: -

Buy Scenario: -

On the upside, the first resistance level at 181.58 is a significant resistance point, having acted as a high point in multiple swings previously. It also aligns with the 61.80% Fibonacci Projection, adding to its significance as a potential barrier for upward movement. Furthermore, the second resistance level at 182.31 is recognized as a swing high resistance and coincides with the 61.80% Fibonacci Retracement, making it another key level to watch for potential resistance. Till we do not advise to buy GBP/JPY.

Sell Scenario: -

The GBP/JPY chart currently shows a bearish overall momentum, indicating the potential for further downward movement towards the first support level.

The first support level at 179.72 is crucial as it has acted as a support in multiple swings in the past, suggesting its significance in potentially stabilizing the price. Additionally, the second support level at 178.33 is notable for its Fibonacci confluence with the -27% Fibonacci Expansion and the 145.00% Fibonacci Extension, further reinforcing its importance as a potential support level. Till we do not advise to sell GBP/JPY.

Support and Resistance Level: -

Support          Resistance  

S1 179.78  -   R1 181.60

S2 178.89  -   R2 182.54

S3 177.96  -   R3 183.42