GBP/JPY in focus ahead of Brexit vote

In the immediate run-up to Thursday’s EU referendum in the UK, as market participants have increasingly come to doubt the probability of a pro-Brexit outcome, a general "risk-on" environment has enveloped global markets. With respect to currencies, the two that potentially stand to gain or lose the most from the outcome of the vote, the British pound and the Japanese yen, have reacted in somewhat predictable ways to this new market environment.

Whereas the volatile pound was heavily pressured and the safe haven yen was strongly boosted only a week ago, when formal polls had been showing robust momentum for the Leave camp over Remain, late last week saw a sharp reversal after the tragic killing of pro-EU British politician Jo Cox. That event partially contributed to increased support for the Remain camp which, in turn, helped to allay the markets’ previously rising concerns over a Brexit outcome. This prompted a sharp relief rally for sterling while simultaneously disrupting the relentless rise of the safe haven yen.

For GBP/JPY, this turn of events was accentuated by a clear hammer candle reversal pattern that established a new three-year low near the key 145.00 support target before turning back to the upside. From a longer-term perspective, GBP/JPY has been entrenched in a clear bearish trend for the past year and even began to accelerate its fall since late 2015.

With the UK’s EU referendum just a day away, GBP/JPY’s ability to sustain the current rebound or sharply reverse it should depend entirely upon the outcome of the Brexit vote. While the Remain camp has certainly had a late surge in momentum, most recent polling as indicated by several polls of polls has shown the two sides of the debate essentially "neck and neck" in an extremely tight race. The result could very well be decided by the sizeable group of undecided voters.

With respect to GBP/JPY, a Remain outcome should likely lead to a further recovery of the embattled currency pair from its long term lows. Such a recovery could be limited, however, due to the current rebound showing that the markets have already priced-in, to a certain extent, a greater likelihood of a Remain outcome. A further surge for GBP/JPY on a pro-EU result, therefore, could well be limited to the upside by key resistance around 164.00.

A Leave outcome, in contrast, would likely prompt a precipitous fall for the currency pair, well below its recent 145.00-area lows. Such a breakdown could likely lead to a rapid plunge below 140.00 and well into the 130.00’s, or lower. It should be kept in mind, however, that any such drop could very well be followed by a strong opposite reaction, especially in the event that Japan acts quickly to intervene in attempts to stem the unwanted strengthening of its currency.

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