The pound has been facing a great deal of downside pressure lately. The GBP/JPY trading pair has been trading around 1% lower since the beginning of the new year as the risk remains firmly to the downside.
Fundamental analysis: BoE hints at a rate cut?
The sterling has been facing additional pressure to start the week after Gertjan Vlieghe, the member of the Bank of England’s (BOE) Monetary Policy Committee (MPC), hinted that the bank may decrease the key interest rate if data does not suggest a rebound for the U.K. economy.
“With the relatively limited space to cut Bank rate, if evidence builds that the weakness in activity could persist, risk management considerations would favour a relatively prompt response,” he said.
His colleague, and a fellow member of the MPC, Silvana Tenreyro, shared the same opinion.
“If uncertainty over the future trading arrangement or subdued global growth continue to weigh on demand, then my inclination is towards voting for a cut in Bank rate in the near term.”
Back in November, at the last meeting of the MPC, two members voted to cut rates. The next meeting of the BoE is expected to take place on January 30.
Following these comments, bank analysts see room for rate cuts this year, which would have a bearish impact on the sterling.
“Last week, comments from BoE’s Governor Carney were also viewed as dovish as were remarks from Tenreyro. Currently UK GDP growth is below trend and CPI inflation is below the Bank’s inflation target. Any sign that talks between the UK and EU on their future arrangements are not smooth would increase downside risks to the UK economy”, Rabobank analysts noted.
Elsewhere, the Prime Minister Boris Johnson has already dismissed the possibility of extending the post-Brexit transition period beyond December 2020, which may prolong the uncertainty over Brexit.
Technical analysis: Bearishness prevails
Looking at the technical picture, GBP/JPY has returned below the down-slipping trend line. A break that occured in December didn’t last long as the bulls were unable to use the break as a base for higher levels.
As a result, there is a risk that GBP/JPY may retreat to test 140.00 this week, where the major horizontal level is located. If that level capitulates, the next in line is 138.00, where two most important moving averages – 100-DMA and 200-DMA – meet.
A potential rate cut and a dovish statement from the BoE may facilitate a trip to the levels below 138.00. In this case, the mid-term target for the bulls is $134.70, which represents the major Fibonacci retracement level.
The prolonged Brexit uncertainty, in addition to the increased dovishness from the BoE, have created a new wave of downside pressure on the pound. If the central bank agrees to cut the key interest rate on January 30, a trip to levels near or below 135.00 should not be excluded.