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Pound-Yen Tipped to go Higher Near-Term, but Two Major Risks to this Exchange Rate are Fast Approaching

Pound-Yen analysis

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- GBP/JPY looking bullish short-term

- Medium-term trend remains up

- UK election is risk 1

- U.S. tariff decision is risk 2

Sterling's rally against the Japanese Yen is being tipped to move higher over coming hours according to fresh technical analysis, but expect markets to stay weary of GBP/JPY ahead of the crunch UK election and a key December 15 U.S. tariff decision.

The Pound-to-Yen exchange rate is presently quoted at 143.077, and research from Auto Chartist - a technical analysis alert service - suggests there is "possible bullish price movement" at hand that could see Sterling deliver further gains.

A note from Auto Chartist out on Tuesday, December 10 says a triangle pattern has been identified on the short-term charts they monitor (covering recent hours), and "this pattern is still in the process of forming. Possible bullish price movement towards the resistance 14311.5 within the next 20 hours."

Symmetrical triangles are patterns where exchange rate movements grows increasingly narrow, and they are typically followed by a breakout to either side, up or down.

Auto Chartist research suggests the balance of probabilities for any break of the triangle presently lie to the upside.

The short-term positive setup in GBP/JPY is echoed in longer-term timeframes as the exchange rate has been rising since August, and there is no convincing evidence that the multi-week rally is yet in danger of fading.

Pound to Yen climbing

Key to the Yen's movement this week will be a looming decision to be made by the U.S. on whether to delay a tranche of tariffs on Chinese imports, due to come into effect on December 15.

The U.S. is looking to add a 15% tariff on $150BN worth of Chinese imports, announced in the late summer.

This round of tariffs could hurt both sides moreso than prior rounds as the bulk of goods to be tariffed are consumer goods, rather than capital or intermediate goods.

Trump must decide by December 15 whether to delay or proceed with the tariffs. A decision to delay would boost 'risk-on' assets, which include developing market currencies and currencies with high exposure to China, including the Australian and New Zealand Dollars.

Losers of delay would be those currencies that tend to appreciate during bouts of market softness and fall when markets are in a positive mode. For the Yen, and other risk-sensitive currencies, the decision by the U.S. could therefor well determine how the remainder of 2019 plays out.

"Sensitivity to risk remains paramount to some currency crosses, and the back and forth on tariffs and the outlook for a U.S./China trade deal are easily recognisable in JPY, CHF, SEK and NOK," says Magne Østnor, Markets analyst with DNB Bank ASA.

The ongoing GBP/JPY rally is meanwhile also being underpinned by ongoing expectations for the UK to deliver a decisive win for the Conservatives in Thursday's election, an outcome that would immediately lay to rest months of uncertainty over Brexit.

"There are two reasons why a Conservative majority in Parliament after the election favours the pound," says Richard Falkenhäll, senior FX strategist at SEB:

1) "it would create a stable political situation and reduce the risk that the Labour party will have any political influence."

2) "it provides clarity on what will happen to Brexit.”

The immediate risk to Sterling ahead of the actual vote on Thursday is the release of a YouGov seat prediction model, and foreign exchange markets will likely trade the outcome as it is considered a potential guide to Thursday's result.

The MRP model takes YouGov's latest polling statistics and projects them into seats; it is considered to be the most detailed and accurate form of polling currently being deployed and it correctly called the hung parliament that resulted from the 2017 General Election.

Sterling rallied sharply following the release of YouGov's first MRP model on Wednesday, November 28. which showed the Conservatives were on course to achieve a majority of 68.

But should the YouGov MRP model suggest the odds of a majority are not as high as market expectations, there is a risk Sterling could correct lower. If the result suggests a larger majority than markets might be expecting, Sterling could add to its gains. Stephen Gallo, a strategist with BMO Capital Markets says he expects "the bid tones in the GBP and the EUR vs the USD to persist at least into" the release of the MRP model.

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