GBP/JPY slides back to 155.60s amid equity market weakness after failing to hold above 156.00 level

GBP/JPY spent most of Wednesday’s session going sideways within 155.50 to 156.20ish parameters, with the 21-day moving average and last Friday’s lows around 155.50 offering substantive support. Hotter than expected UK December consumer inflation numbers out early during European trade combined with comments from BoE Governor Andrew Bailey at the US open were unable to support the pair above 156.00. Despite the governor sounding very concerned about inflation and not saying anything that would diminish expectations for a 25bps rate hike next month, GBP/JPY has ebbed back lower to the 155.60s and is eyeing a test of session lows.

The move lower in the pair likely reflects further losses in the US equity space, with the major indices currently down between 0.1-0.5%. Investors continue to fret about the prospect of rapid monetary policy tightening from the Fed which is expected to kick off in March. Equity market downside since the start of the year (the S&P 500 is down over 4.0%) has weighed on risk-sensitive currency/JPY crosses like GBP/JPY. The pair is now flat on the year and about 1.3% below recent near-158.00 highs. Risk appetite may remain ropey ahead of next week’s anticipated to be very hawkish leaning Fed meeting.

That suggests it makes sense for GBP/JPY to remain in its recent bearish trend-channel for now, suggesting a break below the 21DMA and test of support at 155.00 this week seems likely. Risk appetite is going to need to see broader stabilisation for GBP/JPY to revert to trading as a function of central bank divergence, which would decisively favour the pair moving higher. Japan December CPI and UK December Retail Sales figures out on Friday are unlikely to have too much of an impact.