- GBP/JPY witnesses heavy selling for the third straight day and dives to a multi-month low.
- The bleak outlook for the UK economy, a sell-off in the UK debt market weighs on sterling.
- The global flight to safety lifts the JPY and further contributes to the steep intraday decline.
The GBP/JPY cross remains under intense selling pressure for the third straight day and plunges to over a four-month low, around mid-156.00s during the European session on Friday.
The British pound continues with its relative underperformance amid the worsening outlook for the UK economy, which, in turn, is seen weighing heavily on the GBP/JPY cross. The fears were fueled by the disappointing release of the flash PMI prints, which showed that the downturn in British businesses steepened in September. Adding to this, a survey from the Confederation of British Industry revealed that the retail balance fell to -20% in September from +37% in August.
The selling bias around sterling picks up pace after the new UK government unveiled a radical economic plan in a bid to boost growth. Finance Minister Kwasi Kwarteng announced reductions in the top rate of income tax, national insurance, and stamp duty worth £45bn. The stimulus will be financed in large part by selling gilts, raising concerns over the cost of the government’s borrowing plans and triggering a sharp sell-off in the UK government debt market.
The spillover effect takes its toll on the global risk sentiment, which is evident from a sea of red across the equity markets. This comes a day after Japanese authorities intervened in the market for the first time since 1998 to stem the rapid decline in the domestic currency, which boosts the JPY's relative safe-haven status against its British counterpart. This was seen as another factor contributing to the heavily offered tone surrounding the GBP/JPY cross.
From a technical standpoint the pair has broken below a key trendline which also composes the base of a rising multi-year channel at 158.50. A close below the channel on Friday – which is looking almost certain – will provide confirmation of the breakout and suggest more heavy sellling to come. Whilst a throwback move back up to the lower channel line is possible, prices are eventually expected to reach a target at around 153.50, which is the 61.8% Fibonacci extension of the last move within the channel prior to the breakout extrapolated lower.
That said, extremely oversold conditions on intraday charts hold back traders from placing fresh bearish bets. Nevertheless, the GBP/JPY cross remains on track to end the day deep in the red and record losses for the second successive week. This might have already set the stage for a further downfall towards the May monthly swing low, and another interim target at around the 155.60 region.
Technical levels to watch
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