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GBP/JPY pressured as risk concerns heighten

Within the past week, sterling has finally begun to show signs of weakening against the US dollar after a prolonged bullish trend. Against the euro, the pound has been steadily falling for the past three months. GBP/JPY has also begun to falter as a weaker pound has combined with heightened safety demand for the Japanese yen amid rising concerns over the North Korean nuclear threat.

Sterling weakness was exacerbated last week when the Bank of England issued its latest monetary policy decision. The official bank rate was kept unchanged, as widely expected, but only two dissenting voters in the Monetary Policy Committee voted for a rate hike. Some had been expecting more hawkish MPC votes. Additionally, in the accompanying BoE Inflation Report, the outlook for economic growth and wage inflation were lowered. The negative effect of these factors on the pound was clear and substantial, as the currency fell sharply against all of its major counterparts.

In the case of GBP/JPY, the sterling drop prompted a breakdown below a triangle consolidation pattern just off the recent highs. That consolidation initially began after the currency pair hit a peak and then pulled back from major resistance around the 148.00 price level in early July. The current drop has reinforced the validity of that resistance. After the consolidation breakdown, GBP/JPY fell further to break below its 50-day moving average and follow-through to the downside.

As of Wednesday, the currency pair continued to drop to approach major support around 142.00 and its 200-day moving average before paring some of those losses. Partly driving the extended plunge was increased demand for safe-haven assets like the yen (along with gold and the Swiss franc) amid concerns over intensifying threats between North Korea and the US.

Looking ahead, major geopolitical risks are likely to heighten rather than dissipate in the near-term, and this could mean further demand for the yen. At the same time, the relative dovishness of the Bank of England, as well as ongoing uncertainties surrounding the current UK leadership and Brexit negotiations, are likely to remain a heavy weight on sterling. When these dynamics are combined, the bias for GBP/JPY leans towards the downside. From a price perspective, a breakdown below the current 200-day moving average and the noted 142.00 support level would be a key bearish indication for the currency pair. In the event of such a breakdown, the next major downside target resides around the key 139.00 support level.

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