GBP/JPY pressured on increased Brexit risk, yen support

Tuesday’s horrific attacks in Belgium initially led to a sell-off in European and US equities, a sharp surge for safe-haven assets like gold and the Japanese yen, and a steep plunge for the British pound. While equities mostly reversed course and managed to squeeze out modest gains by Tuesday afternoon, and both gold and the yen pared their earlier advances, sterling remained pressured against the dollar, euro, and yen due to the potential ramifications of the Brussels attacks.

These ramifications are mostly related to the upcoming "Brexit" referendum in late June, when a vote is scheduled on whether or not the UK will remain a member of the European Union. With the prospect of a Brexit having gained some solid political support in recent months, the devastating events in Belgium on Tuesday morning have further increased calls for the UK to abandon its EU membership.

Speculation over the potentially severe economic consequences of an actual UK exit has increasingly weighed on the pound, especially since the referendum date of June 23rd was confirmed in February. Some market participants have recently warned that a Brexit could damage UK economic growth substantially and potentially result in another 20% drop in the pound’s value against the dollar.

In the case of GBP/JPY, aside from Brexit concerns, pressure on the currency pair may be further amplified by recent yen strength. Aside from last week’s Bank of Japan meeting where the central bank opted to keep interest rates on hold instead of cutting rates further into negative territory, another factor that could lead to more support for the yen would be any return of stock market volatility. Despite the recent recovery in global stocks and the swift rebound after Tuesday’s tragedies in Brussels, markets remain highly vulnerable to global economic and political risk. With the yen having long served as the de facto safe haven currency, any such heightened risk generally helps to support and boost the Japanese currency.

From a technical perspective, GBP/JPY is not far off from its new two-year low of 154.70 that was hit in late February. Since that low was hit, the currency pair rose to major resistance around the 164.00 level by mid-March as the pound staged a significant relief rally. Even at the height of this rally, however, GBP/JPY has continued to remain consistently below its 50-day moving average, as has been the case since December and throughout the course of the currency pair’s recent sharply-declining trend.

Tuesday’s drop has prompted a tentative dip back down below the key 160.00 psychological level. With sustained trading under 160.00, the next major downside target is at the 156.00 support level. Any further downside momentum on increased concerns over a Brexit and continued support for the yen could then open the way for an extended drop towards the important 150.00 psychological level.

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