GBP/JPY Surges Higher as Rates Differential Gains Momentum


Analysis:

  • GBP/JPY continues bullish run from Q4 2021
  • Delving into the currency carry trade, highlighting key technical levels
  • The analysis contained in article relies on price action and foundational trading knowledge. To learn more, check out our DailyFX Education section.

GBP/JPY Kicks Off 2022 the Same Way it Ended 2021

GBP/JPY is a market that started to gain attention in Q4 of 2021 as inflation in the UK prompted the first rate hike (15 basis points) since the start of the pandemic in an attempt to control inflationary pressures in the UK economy. Long GBP/JPY is the Top Trading Idea from Justin McQueen for Q1 2022

A decision by the Bank of England (BoE) in November to leave rates unchanged sent the pair spiraling, only to be made worse by the discovery on the Omicron variant. Since then, the BoE rate hike on December the 16th has propelled GBP/JPY higher and the trend continues in the early trading days of 2022.

Currency Carry Trade

A currency ‘carry tradeinvolves borrowing a low-yielding currency in order to buy a higher yielding currency in an attempt to benefit from the interest rate differential. This is also known as ‘rollover’ and forms an integral part of a carry trade strategy. Traders gravitate towards this strategy in the hope of collecting daily interest payments over and above any currency appreciation from the actual trade. The Yen looks to be a suitable candidate for the ‘funding currency’ as Japan continues to implement negative interest rates in an attempt to grow the economy and stoke inflation (further).

Take a look at our dedicated article for an in-depth breakdown of the carry trade

The Carry Trade Genesis and Key Technical Levels (GBP/JPY)

The rate hike was agreed during the Bank of England’s December meeting but was highly anticipated the month before – seen by rising implied probability of a hike in UK money markets at the time. After the BoE decided to leave the interest rate unchanged the GBP/JPY pair corrected immediately by dropping towards the 153 level. Adding to the bearish move was the discovery of the Omicron variant which sent the pair tumbling further, towards the zone of support around 148.50 – 149.50.

Therefore, a bounce off the zone of support after the rate hike in mid-December served as a great launchpad for the start of the carry trade. The last two weeks in December saw the pair regain most of its November/December losses and after a brief pullback towards 154.75, the pair has surged past 156.60. The most immediate level of resistance prints at 158.25 which would really bolster the bullish narrative with the next level of resistance only at 164.

Considering the rather fast bullish move, another retracement should not be discounted. Nearest support comes in at 154.75 while a deeper retracement could even reach 153.50.

GBP/JPY Daily Chart

Chart prepared by Richard Snow, IG

For reference, the monthly chart helps to view current price action within the context of the pairs historical range. Over the near term, the pair may seem like there is little more room to run but after zooming out it is clear to see that the Pound had traded much higher when trading against the Yen.

GBP/JPY Monthly Chart

GBP/JPY Monthly Chart

Chart prepared by Richard Snow, IG

— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX





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