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- GBP/JPY stuck in range between 140 and 150 levels.
- To remain range bound with no clear directional bias.
- Brexit remains key for GBP as inflation drives the Yen.
The GBP/JPY rate is to remain trapped within its 140-150 range after repeatedly failing to break above the 150 level in recent weeks.
Last week we forecast a continuation higher to a target around 152 but the market has since regressed back to the mid-140s area. The week ahead outlook is evenly balanced and the market's 'random walk’ is likely to continue.
Under these conditions it's difficult to tell which direction the pair is likely to go next so we reserve judgement until a range breakout occurs.
Above: Pound-to-Yen rate shown at daily intervals.
A break above the 150 level would be significant and probably mark a bullish evolution in the trend, although the exchange rate has failed at this level on multiple occasions. From a technical standpoint, this increases the potential for volatility if and when a break finally occurs. Likewise, a move below the 140 August low would have the same effect to the downside.
Above: Pound-to-Yen rate shown at weekly intervals.
On the fundamental front the outlook remains neutral. The Yen is a safe-haven so it rises along with risk aversion in markets however, apart from Italian budget crises, U.S.-China trade war and Brexit concerns there is nothing brewing on the global front to suggest a sudden rise in the Japanese currency is likely. Crises often come as a surprise though.
There has been little change in the outlook for monetary policy, which remains supper-accommodative, in Japan either. Bank of Japan (BOJ) governor Haruhiko Kuroda said recently he feels negative interest rates are necessary to lift inflation to the Bank's 2.0% target and that the chances of consumer prices reaching this target by 2020 are quite low.
As far as economic data goes, Tuesday saw the release of trade figures for October. The trade balance fell to a deficit of JPY -449 billion during the recent, deeper than the JPY -70 billion expected by markets and more than reversing the JPY 131 billion surplus seen in September.
Wednesday sees the next release for the Yen, which is the all industry activity index. That is forecast to show a -0.8% drop compared to the previous month of August. However, the biggest event of the week for the Yen is the release of inflation data on Thursday.
Headline inflation is expected to remain at 0% month-on-month and rise by 1.4% compared to the previous year. The annual figure would be an improvement on the 1.2% seen previously. Core inflation is expected to have held steady at 1%.
Inflation is a key dictator of interest rates. When inflation rises above target central banks tend to respond by putting up interest rates. Rising interest rates tend to lift currencies so a higher inflation result on Thursday might boost the Yen. This is especially true if the rise is unexpected, as the market will not have already priced it into the exchange rate.
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