By Giles Coghlan, Chief Currency Analyst at HYCM
The medium-term case for GBPJPY bears remains in place. Here is the rationale for the bear case in the GBPJPY pair.
- Time is running out for the EU-UK trade deal. The UK only has until the end of June to reach an agreement on any EU-UK trade extension. It seems that COVID-19 delays are not enough to automatically grant an extension and PM Johnson is happy to head to the deadline day without an extension. As a result, if no extensions are agreed by the end of June deadline, this opens up the possibility of a hard Brexit. This is GBP bearish.
- As long as the talk around negative interest rates remains then this keeps bears with the finger on the trigger for shorting the GBP.
The UK is expected to be one of the worst major economies to be hit due to COVID-19 lockdowns.
The JPY is the go-to risk-off currency and has been strengthening lately on the pre- FOMC jitters. Even more so now the Fed has disappointed markets with not putting yield curve control into place. There are further reasons for potential JPY strength going forward. They include the following:
- US/China tensions
- China Australia trade tensions
- Euro relief fund rejected by the frugal four
- Global pick up in COVID-19 deaths as cases of death accelerate
- The dreaded second wave of COVID-19
Pullback entry would be here as marked on the chart above as long as the trade conditions remain the same.
Sell on stop scalping entry would be as follows. Traders looking for the trendline to break could try a sell on stop at 136.35 risking 20 points and trying a total of three times for the break. Since writing this post yesterday the FOMC has pushed this initial trade into play and investors jumped on the trend line break. However, an alternative for some traders would be a sell limit order looking for a retest of the trend line break at 136.60 with a tight stop loss above at 137.20.