GBP/JPY bears on the prowl and testing weekly support

GBP has collapsed in classic risk-off fashion with the US dollar rallying to fresh cycle highs in the pursuit of blue skies on the DXY chart. 

At the time of writing, cable is trading 1.3640 and down close to 1% while the GBP/JPY cross is lower by the same percentage with USD/JPY flat on the day. 

The Currency Strength Indicator(s) show that the yen, US dollar and CHF are the strongest on the day with GBP coming in the weakest of the majors besides the commodity-linked currencies, AUD, NZD and CAD. 

This leaves GBP/JPY decidedly better offered for the remainder of the week. 

It boils down to the divergence at the central banks and the risks of the spread of the coronavirus. 

The market’s perception is that the Bank of England took a very slight hawkish turn at this month’s meeting with the Bank having done little more than dip its toe in the waters of policy change.  

In contrast, the market has made up its mind that the faster the Fed taper, the sooner the path will be cleared for a rate hike and that divergence is a driving force currently, weighing on on GBP.

''For most Bank of England watchers the Bank rate at 1.5% will currently appear elusive,'' analysts at Rabobank said.

''The Bank’s ‘hawkish’ tone last week may have been sufficient to spark a debate as to whether the Bank rate could be lifted towards the end of next year rather than in 2023, but few would argue with the view that the Bank remains in no rush to adjust policy settings.''

In addition, UK inflation data showed a sharper slowdown than expected and if it were not for the more positive result in the state of the labour market report on the same day, Wednesday, the pound would likely be even lower. 

British inflation fell to the Bank of England's 2% target last month. Economists polled by Reuters had expected a 2.3% rise in consumer prices following a 2.5% rise in June.

Meanwhile, however, Derek Halpenny at MUFG said Wednesday's strong data from the labour market, a key determinant of future inflation, was "perhaps more important as it revealed another strong print that in our view reinforces the prospect of a rate hike cycle commencing in the second half of next year."

As for the US dollar, the price, as measured against a basket of major currencies in the DXY index, has shot up through a critical area of confluences in resistance which opens the case for a longer and higher US dollar. 

DXY takes on critical resistance confluence

As per prior analysis, US dollar bid for its safe-haven status and on central bank divergence, the USD market is being driven by concerns around the global coronavirus pandemic and rising infections as well as tighter money conditions keeping  the US dollar smile theory in play:

GBP/JPY technical analysis 

As the US dollar turns higher, GBP will be vulnerable to lower and against the safe-haven yen, its days could be numbered. 

The price was recently rejected near 151.40 and it has gone on to break below two-hourly support areas of 150.36 and 150.00, the latter being higher critical. 

The next level of interest is near 149.40 and then near 148.80 as the price stares into the abyss on the weekly charts: