GBP/JPY consolidates in low 155.00s after technical selling, BoE meeting looms

• GBP/JPY is consolidating between 155.00 and its 21DMA.
• The pair broke to the downside of a descending triangle formation recently.
• The Bank of England meeting could spark volatility on Thursday.

GBP/JPY has spent the majority of Tuesday’s session consolidating close to the 155.00 level and its 21-day moving average at 155.35. Since slipping below support at the 156.00 level on Monday, the pair has been trading with a negative bias, although the downside seen on Tuesday has more to do with broad yen strength rather than on Monday, which had more to do with broad GBP weakness at the time as a result of Brexit tensions and uncertainty regarding this week’s Bank of England rate decision.

As to why the yen is performing well on Tuesday (it is the best performing G10 currency on the day), it it probably because long-term bond yields across developed markets (particularly in Europe) have been on the back foot, thus putting downwards pressure on rate differentials with Japanese bonds. For reference, US 10-year yields are consolidating close to recent lows around 1.55%, while 10-year German yields have dropped back sharply from above -0.10% on Monday to current levels around -0.17%.

For the GBP/JPY pair, some technical selling might also be at play; the pair formed a descending triangle in recent weeks, with support coming in at 156.00 and a downtrend linking the 20, 26 and 29 October highs. Such patterns are often indicative that a downside break is in the offing.

Bank of England in the spotlight

Looking ahead to the rest of the week, the fundamentals will once again take precedent; the main event for GBP this week is the Thursday Bank of England meeting. While UK money markets pricing suggests a rate hike of at least 15bps is almost a certainty, economists are more divided, as seemingly is the BoE’s rate-setting committee (called the Monetary Policy Committee or MPC).

To sum up the differences in opinion; hawkish BoE members (including Governor Andrew Bailey and Chief Economist Huw Pill) have expressed concern that if the BoE does start taking its foot of the “accelerator” (i.e. start unwinding ultra-accommodative policy) with YoY rates of Consumer Price Inflation hitting multi-year highs (and likely to go above 5.0% in 2022) and the output gap now closed (i.e. the economy having recovered to its pre-pandemic size), medium-term inflation expectations risk becoming de-anchored. Conversely, the dovish members have argued the bank should until December so the bank can properly observe the impact that the end of the government furlough scheme had on the labour market.

A few analysts have pointed out that, given recent hawkish rhetoric from the BoE Governor and others that has pumped market expectations for rate hikes as soon as November, the bank might face credibility issues if it fails to live up to these expectations. The vote on interest rates is likely to be split with the four known hawks voting for an immediate 15bps rise, while the three known doves might vote to hold rates at 0.1%. That leaves two MPC members who can decide the outcome, with only one needing to vote for the hike to set it in stone. Note that the bank will vote on whether or not to continue its bond-buying programme until the year’s end.

The BoE will release its quarterly Monetary Policy Report, which contains its latest economic forecasts. Some have suggested that there is a risk that the new long-term inflation forecasts might suggest a less aggressive hiking cycle from the BoE than money markets are currently pricing; short sterling futures suggest more than 100bps of rate hikes in 2022. Some have suggested the bank might try to play down the aggressiveness with which it plans on hiking interest rates over the coming years verbally as a way to bring the more dovish MPC members on side.

Either way, the higher than usual uncertainty surrounding the meetings suggests that the reaction in GBP pairs like GBP/JPY could be very choppy. Note that Thursday also sees UK Brexit Minister David Frost and the French Secretary of State for European Affairs getting together to talk fish, as both sides try to avoid tensions escalating into a full-blown trade/legal battle.