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- GBP/JPY will ultimately extend its downtrend
- August lows could keep Sterling supported over coming days
- For Yen risk appetite will likely remain main fundamental driver
The Pound-to-Yen exchange rate is trading at 140.47 at the time of writing, up about a quarter of a percent from the previous week’s close.
The Pound appears to be higher across the board, part of the reason may be favourable month-end flows but the gains come in the context of a downtrend in GBP/JPY since November highs at 149.50 were rejected and we believe the trend should ultimately continue.
The August lows could however prove supportive over the short-term and a rebound is possible over coming days as a result, however any strength will probably only be short-lived before the dominant downtrend continues.
A break below the 139.49 lows would confirm a clear break below the August lows and a continuation down to the next probable target at 138.00. Assuming a break occurs the target will probably be reached within a week.
RSI Momentum in the lower pane is relatively bearish and is closely mirroring the exchange rate’s decline. This is normally a sign the trend has good underlying strength and adds to the evidence of a bearish continuation.
The weekly chart shows the bullish wedge pattern which formed since the January highs more clearly.
After the exchange rate spectacularly failed to break out of the wedge in November, capitulating instead, it raised the possibility it might not actually be a wedge pattern at all, suggesting a more bearish longer-term picture instead.
While the interbank exchange rate on GBP/JPY is at 140.78, high street banks are offering rates at around 135.85-136.84 for international payments, however independent currency specialists are offering rates in the 139/50-140.08 bracket.
The Yen: What to Watch
It is a quiet week for the Yen with only one major release in the form of the final estimate of Nikkei Manufacturing PMI scheduled for Friday, January 04 at 00.30 GMT. The final estimate is expected to come out at 52.2 from 52.4 previously.
Apart from that, however, the Yen is likely to be moved by risk sentiment. Stock markets are a barometer of risk trends and are bouncing at the moment.
As long as markets are in a more optimistic move it is negative for the Yen, which does better when markets are fearful because of its safe-haven appeal.
Investor sentiment was lifted at the start of the new week after U.S. President Donald Trump said over the weekend he has held a "long and very good call" with Chinese President Xi Jinping and that a possible trade deal between the United States and China was progressing well.
The trade war between the two countries has hung over markets for much of the year, and any progress would remove a large headwind for equities but would likely weigh on the Yen.