GBP/JPY slides back beneath 140.00 and towards 21DMA in low 139.00s

• GBP/JPY was on the back foot on Monday amid a break softening of pound sterling.
• Sterling underperformed amid a combination of seeming disappointment in the UK/EU trade deal and Covid-19 lockdown fears.

GBP/JPY was on the back foot on Monday, closing the session with losses of 0.54% or 75.3 pips, with GBP the worst performing G10 currency on the day. The currency was unable to break convincingly above the 141.00 level on confirmation that Brexit deal had been reached last week and thus failed to press onwards towards the annual highs set back at the start of September of 142.71.

Rather, the pair has slipped back below the 140.00 level and back into recent ranges, where its has spent most of the last two months between roughly the 137.00 level and 140.00. Not far to the downside is the 21-day moving average at 139.27. A break below this level would open the door, technically speaking to a move back towards the psychological 139.00, then 138.00 then 137.00 levels (the final of which is the bottom of the aforementioned recent range).

GBP/JPY has been largely driven by sterling flows on Monday; JPY saw relatively tame trade against most of its G10 counterparts aside from GBP amid broadly quiet trade conditions – most market participants in Europe and the US are still on Christmas and New Year holidays. Note that this week could still see choppy trade, however, amid month, quarter and year-end portfolio rebalancing.

GBP the underperformer, what next for sterling?

So GBP seems not to have liked the Brexit deal that UK PM Boris Johnson and Co. managed to wrangle out of the EU in the end. Or, at least, GBP traders seem not to assess the deal as particularly good for the long-term economic prospects of the UK.

But when thinking about the long-term economic prospects of the UK, there is a much, much more pressing issue than the EU and UK’s future trading relationship. The UK economy needs to survive the winter Covid-19 outbreak. How bad the Q1 2021 contraction in GDP is still unclear, though analysts are pretty much unanimous in their expectations that things are going to get ugly.

Covid-19 reported infections hit a record high above 40K on Monday and the UK government is (seemingly) slowly but surely being persuaded by its scientific advisors that the UK must continue to tighten lockdown restrictions or else the virus will run rampant. The situation appears to have drastically worsened as a result of the emergence of the new, much more virulent strain of Covid-19 which now already makes up the majority of cases of the virus in London and the South East.

As the UK moves back towards lockdown, this could weigh on GBP but equally, the arrival of the AstraZeneca vaccine, which is likely to be approved in the UK this week, might help keep a lid on any excessive levels of Covid-19 doom and gloom. The vaccine is much cheaper and easier to distribute that the Pfizer/BioNTech one and will be made in the UK.

With the UK having gotten a strong head start over most of its developed market peers regarding the vaccination programme, that implies that the country will reach herd immunity faster and be able to reopen sooner. UK Cabinet Minister Michael Gove hinted as much on Monday morning when he talked about the potential reopening of parts of the economy from Easter. If the UK does maintain a substantial lead over its peers and is able to reopen potentially months ahead, perhaps this could result in a period of UK economic outperformance and some GBP strength. Perhaps weak underlying economic fundamentals (including the new, sub-optimal EU/UK free trade deal) will keep a lid on GBP.