GBP/JPY closes Monday gap but downside risk remains

The GBP/JPY is trading near the 141.00 major level following a mild recovery from an eleventh month low seen on risk aversion flights piling into the Japanese Yen.

Contagion risk is the buzzword of the week ahead after markets realized last week that Turkey represents a much larger potential for banking risk than previously thought, and the Sterling is taking a step back as broader markets hit full-reverse on risk flows, piling into the safe-haven Yen as the GBP continues to flub. Brexit concerns and fears of a hard-exit are continuing to cap off the GBP, but new market flows into the JPY on Turkish contagion fears are pushing the safe-haven Yen even higher, and the GBP/JPY pairing is down almost 8% in August alone.

It's a calm week for the JPY on the economic calendar, but the British Pound will be seeing some action on Tuesday from the UK's Average Earnings, due at 08:30 GMT. Earnings including bonuses are expected to remain steady at 2.5% over the quarter into June, while earnings without bonuses are expected to see a mild tick down to 2.6% to 2.7%.

GBP/JPY levels to watch

Last week's decline leaves the pair steeply into bearish territory, with support coming from 2017's swing lows of 139.25 and 138.65; a bullish reversal will likewise have to cover a lot of distance before running into meaningful resistance at late June's bottom of 143.75 and the last swing high at 147.15.