Risk concerns extend GBP/JPY slide amid UK election uncertainty

With some recent opinion polls showing a heavily diminished lead for UK Prime Minister Theresa May‘s Conservative Party over the closely-trailing Labour Party, concerns about the outcome of Thursday’s general election in the UK have increased significantly. A Conservative victory on Thursday remains the most likely scenario, and would be seen as positive for the pound as it would signal a potentially smoother, less contentious Brexit process going forward. However, with such a tight race between the two main parties, at least according to some of the latest polling, worries have intensified that May’s Conservatives could fail to secure enough support to ensure a one-party government, or worse, potentially lose to Labour.

Despite these increasing worries, the pound has generally remained relatively buoyant, especially against the struggling US dollar, which has been hit by lower expectations of an aggressive pace of tightening by the Federal Reserve. Against the Japanese yen, however, sterling has been falling sharply for the past month, since the currency pair turned down from a major resistance high around the 148.00 handle in early May. A primary driver of the GBP/JPY slide during this time has been a rise in demand for the perceived safety of the Japanese yen at the same time as gold, another safe-haven asset, has also been surging in conjunction with a deteriorating US dollar. Falling US bond yields have also narrowed the spread between US and Japanese government bonds, further boosting the yen against the pressured dollar.

On Tuesday, only two days before the potentially pivotal UK elections, the combination of poll-driven pressure on the pound and an extended surge in the yen pushed GBP/JPY down to a new six-week low, continuing the entrenched one-month downtrend for the currency pair. How this trend plays out going forward clearly depends to a large extent on the outcome of Thursday’s UK elections. A clear Conservative win should take sterling risk off the table for the time being, potentially breaking the current one-month downtrend and lifting GBP/JPY back up towards 145.00-area resistance. In contrast, any major surprises stemming from a weaker-than-expected outcome for Conservatives could likely extend GBP/JPY’s slide, with the next major downside targets residing around the key 138.50 and 137.00 support levels.

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