GBP/JPY underpinned by dovish BoJ, hawkish BoE

The Bank of Japan rounded off a busy week for central banks earlier today. It struck a more optimistic tone on the outlook for the Japanese economy as it kept its monetary policy unchanged. The bank upgraded its assessment of private consumption and overseas growth. Stronger growth overseas will benefit Japan because its economy is export-oriented.Significantly, however, the BoJ Governor Haruhiko Kuroda refused to be drawn into speculation about an early exit from its vast stimulus programs. Mr. Kuroda said: "There's some distance to achieving 2% inflation, so it's inappropriate to say now specifically how we will exit our ultra-loose monetary policy and how that could affect the BoJ's financial health. Laying out specific simulations now would only create confusion. We will debate an exit strategy only after 2% inflation is achieved and price growth stays there stably." Reading in between the lines, this was as dovish as one could have expected the BoJ to be. As a result, the yen, which had already weakened considerably yesterday, fell further today.

Elsewhere, however, the tide is turning as some of the major central banks are finally in the process of ending their extraordinary loose monetary policy stances. The Bank of England, for example, gave a strong hint yesterday that it may be about to raise interest rates as the “CPI overshoot may be bigger than previously thought.” Three MPC members actually voted for a rate increase but were ultimately outnumbered by the five who decided, for now, to keep monetary policy unchanged. For how much longer will the BoE accommodate the rising UK inflation rates before it becomes a threat?

As a result of a not-so-dovish BoE and a not-so-hawkish BoJ, the pound could be set to gain further against the yen this year. In fact, the British pound/Japanese yen (GBP/JPY) currency pair has already ended its corrective trend that had started in early May, which means that the way has potentially been cleared for the move to begin. The Guppy’s break outside of the short-term downward channel could be significant given that the long-term trend appears to be bullish, as evidenced for example by the rising 50- and 200-day moving averages and also with price making higher lows. But after a sharp bounce over the past day and a half, the GBP/JPY may pullback to a key support level such as 140.90 before potentially resuming its upward trend in early next week. Some of the short-term bullish targets could be the Fibonacci levels shown on the chart, with the 61.8% retracement at 144.50 being our near-term objective. But there’s potential for the rally to extend far beyond that level given the fundamental developments of this week. However, we would be quick to drop our bullish bias if we see a key reversal formation at higher levels or if the long-term bullish trend line breaks, whichever happens first. Until and unless that occurs, the path of least resistance is unambiguous to the upside now.

About the Author

Fawad Razaqzada is market analyst at FOREX.com and City Index brands of Gain Capital.