The GBP/JPY pair is not a major currency pair, but is a currency cross of the British Pound and the Japanese Yen. Both are two of the most widely traded currencies across the global, which means that liquidity, or the amount of investors buying and selling the GBP/JPY, is fairly strong.
As such, the average spread retail traders typically pay on trading one standard lot GBP/JPY is 4.3-4.7-pips, and this spread is lowest during two separate times during the day: when Asia is open, from 23:00 GMT to 02:00 GMT; and when Europe is open, from 03:00 GMT to 16:00 GMT. When the British and Japanese markets are offline, trading of the GBP/JPY thins out, and spreads typically rise from 17:00 GMT to 22:00 GMT.
Factors Influencing the GBP/JPY Pair
Like any other currency pair, the most important factors that determine the GBP/JPY’s price are the local interest rates in each economy. The Bank of England decides the U.K. interest rates typically on the first Thursday of every month. The Bank of Japan meets more frequently, once every four weeks and on occasion, twice a month. A decision to cut interest rates or increase accommodative monetary measures has historically been negative for the local currency. This could also be accomplished through a balance sheet expansion known as quantitative easing.
For example, if the Bank of Japan injects liquidity via its balance sheet to keep interest rates lower and weaken the Yen, the GBP/JPY tends to rise; if the Bank of England announces new easing measures, the GBP/JPY tends to fall.
The basis for the monetary policy decisions and therefore also an important factor for the pair’s price is each economy’s output, or gross domestic product (GDP). Inflation levels are also important factors for the central banks when making rate decisions and consumer price Index (CPI) results will therefore strongly affect trading. While GDP affects both currencies, only CPI affects the British Pound; Japan has been mired in a deflationary slump for the past twenty years, making CPI a more or less inefficient indicator of the Bank of Japan’s policy decisions.
Additionally, other releases that affect trading are indicators that tell of the health of the economy. Higher retail sales and a low unemployment rate, mean a strong economy. The U.K. Production Managers’ Index will indicate future GDP reports. The producer price index will also give clues to inflation changes, but are not as definitive as the CPI. Trade data is particularly important for the Japanese Yen, especially energy import data. If Japanese exporters are pressured by a stronger Yen, which reduces their profit margins, or the economy struggles due to higher oil prices (Japan is an island nation that imports over 40% of its oil), the Bank of Japan becomes more likely to adjust its monetary policy.
Analyzing GBP/JPY Charts
Because of Japan’s proximity to emerging markets in Asia, and given the Bank of Japan’s immense balance sheet due to numerous currency interventions and a prolonged history of low interest rates, the Japanese Yen behaves as a safe haven similar to the U.S. Dollar. Accordingly, when global financial issues flare up, such as the Euro-zone crisis, which is in close proximity to the United Kingdom, investors tend to shift their holdings into the Yen and away from the British Pound. The Euro-zone crisis has greatly impacted the GBP/JPY, which has tracked the Euro for the better part of the past year.
On the GBP/JPY daily chart, while the trend has been lower since the financial crisis began in 2008, prices have recently begun to emerge in a major consolidation pattern for the past nineteen months. This pattern resembles, thus far, a Symmetrical Triangle. Within six months time, however, the termination point of this triangle will have yet to be reached, if it continues to play out.
Given the triangle’s project path on March 1, we expect prices to remain skewed to the downside, ranging from 122.50-125.60, with the potential to fall as low as 119.25. If price is above 125.60 on March 1, a rally into 134.00 is projected; whereas if price is less than 119.25 on March 1, a sell-off towards 110.00 is projected.
Trading GBPJPY – Summary
- Typical Spreads on GBPJPY: 3.9 – 4.3 Pips (During trading hours)
- Most active: Asian Session (23:00 GMT to 02:00 GMT)/London Session (03:00 GMT to 16:00 GMT)
- Widening Spreads between: 17:00 GMT to 22:00 GMT
- Preferred Brokers: LMAX Exchange (0.8 Pips) | Pepperstone (1 – 3.2 pips1/0.3 – 0.2 – 2.3 pips2)
1Pepperstone Standard Account
2Pepperstone Razor Account