Currency Pair of the Week: GBP/JPY

Last week, the BOE hiked rated 25bps to 0.75% and delivered a dovish statement. The central bank noted that further modest tightening “might be appropriate”, as opposed to the previous statement which said that tightening is “likely to be appropriate”. The change reflects the uncertainties surrounding the effects that higher energy prices could have on household incomes. In addition, the BOE noted that they see inflation rising as high as 8% in April, as opposed to seeing a high 7.25% at the last meeting. This week, markets will find out just how close inflation is to the ultimate target. On Wednesday, the UK will release February CPI. Headlines expectations are for a print of 5.9% YoY vs 5.5% YoY in January. The core rate is expected to be 5% YoY vs 4.4% YoY in January. Traders will also get a look at UK Retail Sales on Friday. Also, the UK will release its Spring Budget on Wednesday. Changes are expected to safeguard against future increases in energy, however in the near-term, Sundak may announce a cut in the fuel duty to help families who have been hit by rising energy prices. Other changes could include a reduction in the threshold that people must start paying national insurance and eliminating the VAT on electric bills.

The Bank of Japan also met last week. However, in contrast to the BOE, the BOJ left interest rates unchanged at -0.1%, as expected. In addition, the central bank downgraded its economic outlook, after recently revising it higher. One reason for the downgrade was due to the impact of the Omicron variant of the coronavirus. However, the other reason was due to the potential impact on household incomes due to the rising price of oil, which could also lead to slower growth. Japan is a large importer of oil (and other commodities). BOJ Governor Kuroda said that the rising cost of raw materials will have the biggest impact on Japan’s economy. However, Kuroda also noted that inflation could reach as high as 2%. This week, traders will get their first look at March inflation for Japan as Tokyo CPI is released. Headline expectations are for 1.0% YoY vs 0.5% YoY in February. However, CPI Ex Food and Energy is expected to be -0.4% YoY vs -0.6% YoY in February. This would show that a large percentage of the inflation is due to rising energy and food costs.

GBP/JPY has been trading in a large ranging, sideways channel since February 2021 between 148.47 and 158.20. However, beginning in October 2021, the pair made lower highs and higher lows, forming a symmetrical triangle. GBP/JPY is currently testing the top trendline of the symmetrical triangle near 157.30. Above there price can move to the top line of the channel near 115.22 and then the 127.2% and 161.8% Fibonacci extensions from the high of March 10th to the low of March 8th at 159.98 and 162.42, respectively. If the top trendline holds, support is at the highs of March 3rd near 155.23, then the bottom, rising trendline of the symmetrical triangle near 151.25. If price breaks below there, next support is the March 8th lows at 151.04 and the bottom line of the sideways channel at 148.57.

Source: Tradingview, Stone X

Central bank meetings from last week could continue to influence GBP/JPY. In addition, macroeconomic data and the UK Spring Budget could also add volatility to the pair. Watch important support and resistance levels for indications of where price may pause or reverse direction this week.

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