Technical Analysis

Market Risks Sustain GBP/JPY Pressure

Typography

Aside from a sharp rebound in late January, GBP/JPY has been entrenched in a downtrend for the past three months. This downtrend has been exacerbated in part by ongoing concerns over the impending triggering of Article 50 that will begin the UK/EU separation process (Brexit), which has weighed heavily on the pound. At the same time, global macro risk considerations have helped provide somewhat of a boost to the perceived safety of the Japanese yen.

Confirmation from the UK that Article 50 will be triggered on March 29 has further weighed on the pound on Monday, as concerns remain that the lack of a concrete trade agreement between the UK and EU could make a negative impact on the UK's economy and currency.

Though much of the market's worries over Brexit and Article 50 have already been priced into the lagging pound in the past several months since June's Brexit referendum, many unknowns still remain as to how the UK's economic landscape will unfold as the process of separation begins in earnest.

Aside from Brexit, near-term geopolitical risks in Europe and the US, which include the upcoming French presidential elections and US scrutiny over the Trump Administration's dealings with Russia, could lend to some further support for the safe-haven yen.

Amid these fundamental market risks that have persisted in placing pressure on GBP/JPY, the currency pair continues to follow a falling trend line that extends back to the mid-December high around 148.00. Furthermore, price action has recently been trading in a relatively tight range between its key 50-day and 200-day moving averages, which suggests that the currency pair remains in consolidation and could be poised for a breakout move as the noted market risks unfold.

Ahead of these risks, the directional bias for GBP/JPY continues to lean towards the downside, in-line with the prevailing medium-term trend. If the currency pair continues to respect the noted downtrend line, a clear downside target is at the key 137.00 support level, which is also in the vicinity of the noted 200-day moving average and the 50% retracement of the October-December uptrend.

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