Above: The BoJ's Kuroda warns easy monetary policy in Japan has a limited lifespan. Image © European Central Bank, reproduced under CC licensing.
- GBP/JPY has rallied up to 'make-or-break' highs
- Technicals look increasingly bearish
- Brexit-deal headway could be prime catalyst
GBP/JPY has had an unbroken run of six consecutive 'up days' and is currently rising on its seventh, mainly as a result of the Pound strengthening on improved Brexit optimism.
From a technical standpoint, the pair looks poised to extend higher towards targets in the 153.00-156.00 range as GBP/JPY breaks out of a bullish wedge pattern.
The previous breakout highs of 149.72, established in September, are likely to be key to whether the pair extends or pulls back. If the exchange rate can break above them it will encourage the trend higher, if it fails the pair may be set for a corrective phase.
The proximity of the 149 'make-or-break' level somewhat 'mirrors' the binary outlook for Sterling fundamentals.
Over the next few days, Theresa May will try to get Cabinet backing for an E.U. withdrawal agreement and this could mark a watershed moment for the Pound.
If the deal gets Cabinet's endorsement the Pound is likely to rally, if not, it could sink.
Yet even if it gets the support of the executive the Pound's upside may be tempered by the fact the bill will still have to be voted through Parliament and this could be difficult given the high number of expected critics.
The realisation of these risks may weigh on Sterling so analysts are remaining cautious about calling the start of a post-Brexit relief rally quite yet.
A break above 149.72 would, however, go some way to suggesting a new bullish phase was unfolding. It would probably lead to fresh gains and the extension of the uptrend to the minimum target for the wedge pattern at 153.30. A break above that could even see a continuation to 156.00 at the level of the 200-day moving average (MA).
The appearance of the market since the July lows supports an extension of the current up-leg and a continuation higher.
Momentum is strong and also looks likely to continue rising.
The Yen is unlikely to put up much resistance despite recent comments from Bank of Japan (BOJ) governor Kuroda in which he stated that an easy monetary policy could not go on indefinitely and the longer interest rates remained so low the harder it would be for banks to remain profitable.
The rule-of-thumb is that the ending of easy monetary policy is good for the Yen as it restricts supply of Yen to the markets, which in turn pushes up the value of the currency.
Kuroda said a large scale 'anti-deflation policy' was no longer needed, suggesting a possible dismantling of quantitative easing (QE), which has had a negative effect on the Yen.
"The BOJ is fully aware of accumulating drag on banks’ profitability as easing continues,” said Kuroda adding, "it’s necessary to closely monitor risks and side effects".
The BOJ governor also suggested the 2.0% inflation target might be too high, although he fell short of stating what a new target would be and said only that if inflation didn't quite reach target it would not be the end of the world.
We know from past experience that these sorts of comments are quite commonplace from the governor of the BOJ, however, so they are unlikely to change the Yen much and, indeed, appear to have had little effect so far on the currency's trajectory.
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