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The Pound-Yen Exchange Rate Jumps on U.S. Tariff Delay, but Outlook Remains Negative

Japanese Yen

Image © Adobe Stock

- GBP/JPY to extend established downtrend

- Floor nearby at 2016 lows

- Yen falls on improved market sentiment following U.S. tariff delay

The Pound has rebounded against the Yen on Tuesday as global risk trends shift against the Japanese currency.

The Yen went lower across the board after the U.S. softened its stance on the next tariff barrier it intends to put up against Chinese goods.

The U.S. on May 17, announced a list of products imported from China that would be potentially subject to an additional 10 percent tariff.

Today, the U.S. announced it was removing some goods from the list, while delaying the imposition of tariffs until December 15.

Markets have read this as an easing in the U.S.-China trade war, which is supportive of stock markets but negative for safe-haven assets such as the Japanese Yen and Swiss franc.

The Pound-to-Yen exchange rate is quoted at 128.55 at the time of writing, having been as low as 1.2655 the day prior.

Regardless of the short-term blip, our latest technical studies suggest the Pound will likely remain biased to further losses against its Japanese counterpart.

Studies of the charts show the pair is in an established downtrend which given the old adage that the trend is your friend it is likely to extend over the short-term.

Four hour GBPJPY

The 4-hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair in a steep downtrend which is likely to continue to its next target at the 2016 lows at 125.00, conditional upon a break below the 126.54 lows.

The pair has just pulled-back into a minor trendline but this is likely to resist further upside and it may well start going down again after this touch.

The RSI momentum indicator is converging bullishly with price action but this is not enough on its own to indicate a reversal in the trend, and the downtrend remains dominant.

The daily chart shows the steep downtrend making its way towards the 2016 lows where there is an increased risk it could bounce initially and go sideways for a while before continuing lower to a target at 122.50.

Daily

The RSI momentum indicator is in oversold territory which increases the risk of a pause in the downtrend. On its own, however, it is not enough to negate the bearish bias - rather it could support the possibility of a temporary bounce from the 2016 lows.

The daily chart is used to give an indication of the outlook for the medium-term, defined as the next week to a month ahead.

The weekly chart - used to give us an indication of the outlook for the long-term, defined as the next few months - shows how the exchange rate has now broken below the bottom of a large wedge pattern which the pair has been forming since the start of 2018.

Weekly GBPJPY

Wedge patterns are normally considered bullish, however, the break below the lower bound probably negates its bullish connotations.

The downtrend is entrenched and it will probably slide lower to an eventual target at 120.000.

The RSI momentum indicator is now deep in the oversold zone which suggests an increased probability of a bounce from the current level.

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The Japanese Yen: Nervous Markets to Drive Yen Demand

The main driver of the Yen in the coming week is likely to be global investor risk appetite since the currency operates like a safe-haven - rising when investors grow fearful and falling when they grow confident.

Currently, markets are permeated by a general air of risk aversion which is likely to continue.

This has mostly been propelled by a mixture of factors from all around the world, including civil unrest in Hong Kong, heightened Brexit risks in the UK, political and economic uncertainty in Argentina, poor credit data from China and a lack of progress in trade negotiations between the U.S. and China.

These have provided a backdraft for the Yen and on Monday it was the best performing G10 currency.

Hong Kong is a major source of risk: increased civil unrest which resulted in the airport being closed on Monday now raises the risk that the Chinese government will intervene to restore order. Such a move could trigger all sorts of repercussions and probably roil markets, as it would potentially exacerbate already tense relations between Beijing and the rest of the world, especially Washington.

Argentina is also a source of risk after President Macri saw his share of the vote fall by 15.5% in primaries held over the weekend. Macri is now at risk of losing power in the main elections held in October and being replaced by a less market-friendly populist president. Argentine government bonds sold at such a discount following the vote that they reflect a 75% probability of a default, which would also see a flight to safety and upside for the Yen.

Chinese credit growth and lending data added to the gloom. Indications the U.S. may be demonised as a culprit of the slowdown will not help improve already strained relations between the two powers.

“Chinese credit growth and lending data were much weaker than expected in July. And the editor of the Global Times, thought to be well-connected to the Chinese government, tweeted that the Chinese state-owned People’s Daily will soon publish an article 'vowing China can defeat any challenge and pressure of the US',” says Nick Smyth an analyst at BNZ Bank.

It is likely that the poor Chinese credit data will lead to an even greater focus on Chinese industrial production data out on Wednesday.

If it undershoots the 5.8% forecast there is a chance investors will read into that that the Chinese economy is slowing because of the trade war. In such a scenario the Yen, of course, would rise.

Seasonal trends are also likely to support the Yen according to Investec, an international banking and asset management group.

“Typically global financial markets experience a sell in May-and-go-away phenomenon, namely the northern hemisphere summer vacation effect which tends to result in an exodus from riskier assets as many market players take time off, and are mostly out of the markets away on holiday,” says Annabel Bishop, an analyst at Investec.

The risk-averse seasonal backdrop is likely to last until the end of Q3, adds Bishop.

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