Pound-Yen Rate Breaks Above Key 50-day MA after Barnier Comments
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- GBP/JPY rises by over 2 Yen following positive Brexit news
- Breaks above a key level in the form of the 50-day MA
- Probability of a continuation higher to upper border of channel in 147s
The Pound-to-Yen rate shot up mid-week, breaking above its key 50-day moving average (MA) and rising by over 1.60% in only a few hours, in a move that suggests the outlook for the pair is turning more positive.
Fuelling the move was a broad-based turn higher by Sterling following suggestions the EU might be willing to give the UK special treatment in negotiations for a Brexit trade deal.
Michel Barnier, the EU's chief negotiator said the EU was prepared to offer the UK a partnership which 'had never been seen with any other third country'.
The comments reflected a big shift in stance from the EU's previous position and suggested a much more viable soft-option might be on the table.
The Pound surged against the Yen after the news, rallying from the lower 143s to the lower 145s.
GBP/JPY climbed above its 50-day MA - a key line in the sand - which investors often use to gauge the trend. When the price is above the MA it is taken as a bullish trend signal; when below a bearish trend indicator. The break above indicates a possible change of trend assuming it can remain above.
Assuming a close above the 50-day MA on Wednesday, we see a high probability of a continuation higher to a target at 147.00 at the upper border of a falling channel the pair has been moving in since the April highs.
If the exchange rate remains above the 50-day MA then it should act as support and any pull-backs should find support at the level of the MA at 144.92, which will prevent it falling too far below.
A close below the 50-day, however, would be bearish sign for the exchange rate.
The RSI momentum indicator rose to levels not seen since the exchange rate was at 148.000 back in July, suggesting the actual exchange rate should closer to that level then the current 145s.
Despite the bullish technicals GBP/JPY is at risk from Yen strength in the future as the currency is the most undervalued in the G10 based on a combination of the REER (Real Effective Exchange Rate) valuation and the PPP (Purchasing Power Parity) models.
Currencies that are grossly out of whack with their modelled values are expected to drift back towards that "fair value" over time, suggesting the Yen could be due a period of strength.
This would actually work counter to the bullish direction suggested by the technicals above and the one-day climb seen today.
An explanation may be that the Pound is also a very undervalued currency. Sterling is considered between 10% and 20% below the value it would be if the UK had not voted to leave the EU.
The fact that both the Pound and the Yen are grossly undervalued means there is still scope for the Pound to outperform.
This might happen it rose more rapidly than the Yen, for example, which could be the case if Brexit risks were suddenly discounted by the increased likelihood of negotiations reaching a positive trade deal.
For the Yen, the only comparable event might be the decision of the Bank of Japan (BOJ) to stop printing money via their quantitative easing (QE) programme, however, most analysts see almost no change of this happening until inflation rises more substantially, which is unlikely to happen until next year at the earliest.
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