GBP/JPY: Breaking lower to 182.50

The GBP/JPY pair has been stuck largely in the range of 184.0-185.00 since last couple of sessions, as the pair fails to sustain gains above185.00, while fresh demand around 183.50 ensures it sustain above 184.00 on the daily closing basis.

The pair could test 182.50 levels in the short-term as–

1. Pound unresponsive to positive data – The British Pound has repeatedly failed to strengthen in the past week or so on the upbeat PMI numbers. Moreover, the currency failed to extend gains above 1.55 against the USD despite Bank of England policymakers, in the last week, indicated next policy move as an interest rate hike.

2. UK Gilt yields fail to support gains in the Pound – Since last week, we failed to see an uptick in the UK 10-year Gilt yields each time the Pound rallied against its G-7 peers. The 10-year yield faced rejection at the 38.2% retracement of the down trend from 2.602% (Oct 2014 high) to 1.337% (Jan 2015 low) located at 1.822%, despite the hawkish comments from BOE members and an upbeat economic data in the UK.
   
   Given this, it is unlikely we could see a sharp positive reaction in the gilt yields and British Pound even if the UK Services PMI due tomorrow prints higher than expectation of 57.5.
   
   The 10-year Gilt yield could push higher above 1.822%, however the US yields too are likely to move higher ahead of the US non-farm payrolls data on Friday. The jobs data in the US in the last three months was stellar. Hence, markets are likely to push up Treasury yields and the US dollar ahead of the Friday’s NFP report.

3. Yen relatively resilient - The Japanese Yen is likely to remain relatively resilient as the equity markets are showing signs of risk aversion. The surprise interest rate cut in China over the weekend failed to trigger a rally in the riskier assets across the globe. Furthermore, the UK’s Ftse trading at record highs, is more vulnerable to a technical correction, which too could weigh over GBP and support the Yen.

4. Election uncertainty could weigh over Pound - The prospect of May's general election, leaving a hung parliament in which no party has a majority is already starting to weigh on the Sterling. This could have been the major reason behind Pound’s failure to respond to the BOE members hawkish comments and an upbeat economic data. Hence, Pound, once again, is unlikely to respond much to a better-than-expected services PMI data tomorrow. However, a weak data could trigger a major downside reaction in the GBP pairs.

On Technical grounds, the pair has repeatedly failed to extend gains even after breaching the channel resistance on a couple of occasions. With the repeated failure at the channel resistance currently located at 184.58 levels, the pair appears more likely to test the 100-DMA at 183.02. Moreover, a failure to sustain above 61.8% Fib retracement (189.68-175.48) located at 184.26, could push the pair down to 182.58 levels (50.005 Fib retracement).

Thus, selling pressure can be anticipated at the current level of 184.20, which could push the pair down to 182.58 levels. The bearish view is at a risk of daily close above 185.00 levels.