GBP/JPY rebound at risk ahead of BoE rate decision

As noted earlier in the day, the Japanese yen took a major hit on Monday due to Prime Minister Abe’s party winning a landslide election victory and the subsequent announcement of further economic stimulus measures in Japan. The yen retreated substantially against other major currencies, including the dollar, euro and pound, providing some respite from the pronounced strength of the Japanese currency within the past several weeks and months. Before Monday’s yen retreat, the currency was near multi-year highs against its major counterparts, pressuring USD/JPY, EUR/JPY, and GBP/JPY towards their post-Brexit long-term lows.

While the rebound for USD/JPY has little in the way of key risk events posing any major obstacle on the immediate horizon, GBP/JPY could face potentially substantial volatility this week. Thursday brings the Bank of England’s (BoE) official rate decision and monetary policy summary. After the UK’s EU referendum more than two weeks ago, the central bank has indicated on a few occasions that it would likely cut interest rates in reaction to Brexit risks. Currently, the consensus forecast is indeed for a rate cut of 25 basis points on Thursday.

The fact that this potential rate cut has already been alluded to by the BoE and expected by the markets should mean that some of the resulting pressure on the pound is likely to have already been priced-in to the beleaguered currency. Despite this, however, an actual rate cut still has some potential to prompt significantly further losses for sterling.

Since June’s Brexit outcome, GBP/JPY has dropped precipitously from the 150.00’s down to its recent lows around key 130.00 support, a level not seen since late 2012. Monday’s rebound prompted a sharp rise from that support level to climb back above 133.00 resistance. This rebound could well have more room to run in the short-term, potentially back up to key resistance around 140.00. This Thursday, however, the BoE rate decision could either help reverse this rebound in the event of a rate cut, or lead to a further recovery in the event that rates are left unchanged. With any Brexit-driven rate cut announcement, a breakdown below 130.00 could begin to target further support to the downside at the key 125.00 level.

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