GBP/JPY at a7-year high – is it a buy or a sell?

on May 31, 2023
  • GBP/JPY reaches a 7-year high as bets on yen's weakness increase
  • UK rates and inflation to stay higher compared to Japan and even the US
  • More upside is possible

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One of the biggest stories so far this year is the Japanese yen’s weakness. Despite the banking crisis in the United States that led to several banks’ failures, investors sold into the yen’s strength.

For example, the USD/JPY dropped below 130 as the banking crisis unraveled in March. But fast forward a couple of months, and the exchange rate is back above 140.

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This is no small thing, as we talk about a sharp reversal of more than one thousand pips points or ten big figures.

Even more impressive is the GBP/JPY cross performance. As it reached a 7-year high, is it a buy or a sell?

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Monetary policy divergence to support the pound

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One of the reasons why investors keep bidding for the GBP/JPY pair is the monetary policy divergence between the two central banks. On the one hand, inflation in the United Kingdom is way above the Bank of England‘s 2% target, albeit is coming down, as seen in the chart above.

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However, while cooling, inflation remains elevated, and the chances are that it will stay much higher than what the Bank of England wishes. Therefore, the pound should remain bid.

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On the other hand, the Bank of Japan keeps its monetary policy unchanged. The yield curve control policy continues and, most recently, BOJ’s Governor, Ueda, warned of the consequences of tightening the policy too soon

Therefore, the divergence between the two central banks’ policies favors more upside for the GBP/JPY pair.

GBP/JPY broke major resistance

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On its way up to a 7-year high, the exchange rate exceeded a major resistance level seen at 168. This is one level where the market failed several times in the past.

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GBP/JPY chart by TradingView

 In fact, it took almost two years for the market to overcome the horizontal resistance, and now that it is above, more upside is possible.

Also, one can note a contracting triangle that also broke to the upside. Given its nature, it appears to be part of a so-called running correction, which means that an extended impulsive wave, typically the third wave in an impulsive structure, follows.

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