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GBP/JPY at critical support level after Brexit deadline announced

After a relative lull in concerns over the UK’s June vote to leave the European Union, Brexit worries resumed in a major way on Monday after UK Prime Minister Theresa May announced over the weekend a deadline of March 2017 to begin the UK’s formal process of withdrawal from the EU. The drawn-out process would be expected to conclude in 2019.

This announcement prompted a precipitous drop for sterling against all of its major counterparts, including the US dollar, euro, and Japanese yen. Despite a significantly better-than-expected economic release on Monday morning – UK manufacturing PMI for September at 55.4 versus 52.1 expected – the data was not enough for the British pound to shake off the renewed specter of an upcoming Brexit.

As sterling fell, the Japanese yen remained stagnant-to-weaker as a general “risk-off” environment enveloped the financial markets, helping lead to pullbacks in safe haven assets like gold and the yen. Despite a relatively lower yen, however, sterling weakness prevailed, pushing the GBP/JPY currency pair back down to major support around the key 130.00 level, just off its post-referendum lows. Although the 130.00 level has been breached to the downside several times on an intraday basis since June’s EU referendum, the support level has generally held steady for the past three months.

The launch of the formal Brexit process could well lead to further pressure on the pound, while upcoming global risk events, including Brexit, could serve to boost the yen. In this event, GBP/JPY could finally see a breakdown below 130.00 that may lead to a continuation of the pronounced downtrend that has been in place for well over a year, and potentially establish a new four-year low for the currency pair. On such a breakdown, the next major downside support target is seen at the key 125.00 level.

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