Pound-Yen Rate to Continue Rising if 50-day MA Successfully Hurdled

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- GBP/JPY remains in short-term uptrend

- Clearance of 50-day MA needed to reignite uptrend

- BoJ meeting key highlight for the Yen

The Pound-to-Yen exchange rate is trading at 140.64 at the time of writing, having weakened on Monday night following reports the U.S. will be proceeding with formal extradition proceedings against Huawei CFO Wanzhou Meng.

According to commentators, the move accelerated the Yen's gains as investors bid the currency in search of a safe-haven amidst a bout of deteriorating market sentiment.

Yet, set against the rise in the Japanese Yen is a steady improving news flow around Brexit which could ultimately keep GBP/JPY supported.

On Monday there were gains from the possibility of a breakthrough in negotiations over the Irish backstop after Jacek Czaputowicz, the Polish foreign minister, suggested a time-limited backstop of 5 years instead of the current perpetual one, saying he thought that might be acceptable to the EU, in interviews with the British and Polish media.

Commentators seemed to latch onto the idea as a way of breaking the deadlock over Brexit and making the deal more amenable to some of those - such as the DUP and hard-Brexiteers - who voted against it.

Whether the rest of the EU’s member states share the view, however, is not known. Of particular importance is whether Ireland would give its backing to such an amendment. The early signs from Ireland’s foreign minister are not promising after he said a time-limited solution missed the whole point of the backstop providing “insurance”.

The technical picture shows the outlook remains bullish for Sterling against the Yen. The pair recovered after initially spiking lower on the day of the flash crash lows. It has continued rising and hit last week’s target at 142.00. Further gains are on the cards although one major impediment to progress higher is the 50-day MA at 142.35, and this would need to be cleared before more upside can be forecast.

A break above 143.00 would supply the necessary confirmation of a continuation of the uptrend to the next target at 145.50 where the 200-day MA is situated.

The RSI momentum indicator in the lower panel has been rising strongly along with the exchange rate, which reinforces the uptrending bias for the exchange rate.

Looking ahead, the pair may be affected by the Bank of Japan (BOJ) rate meeting scheduled for the morning of Wednesday, January 23. The risks are to the downside as economists flag risks Japan could lurch into recession in 2019.

The BOJ’s quarterly forecast report will also be released at the same time as the meeting, and this too could affect markets if, as some analysts think, the Bank’s forecasts are revised down.

“Markets’ attention on Wednesday will, therefore, be on how worried the BoJ is about the growing dangers of a recession and a further southward deviation of inflation from its 2% target,” says a comment from currency news site Action Forex, “while there’s been relief that the Fed has since signalled “patience”, China has pledged more stimulus measures and there’s been some progress in US-China trade talks, the risks to growth and inflation are still clearly to the downside.”

The problem for the BOJ is that if the country’s economy does slowdown it has very little ‘ammunition’ left to stimulate it. The BOJ is already enacting substantial quantitative easing (QE).

Arguably it already has its ‘foot to the floor’ leaving it without alternative means of stimulation.

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