British Pound extends rally vs JPY; climbs to fresh high since January 2008
The GBP/JPY cross builds on the previous day's strong positive momentum and gains traction for the second successive day on Thursday. This also marks the fourth day of a move higher in the previous five and lifts spot prices to the 218.00 neighborhood, or the highest since January 2008 during the early part of the European session.
With frontrunner Andy Burnham expected to become the next Prime Minister by July 20, fading UK political uncertainty has been bolstering the British Pound's (GBP) relative outperformance. Furthermore, a broadly weaker US Dollar (USD) benefits the GBP, which, in turn, is seen as a key factor acting as a tailwind for the GBP/JPY cross. The momentum seems rather unaffected by speculations that Japanese authorities will step in to prop up the domestic currency.
In fact, Japan’s Finance Minister Satsuki Katayama said last week that officials are ready to act appropriately to currency moves. Furthermore, reports suggested that Japan might shift away from the traditional approach of signaling intervention plans and instead focus directly on targeting speculators, raising the risk of surprise attacks in the FX market. However, a wide gap in borrowing costs in Japan and other major economies continues to undermine the JPY.
The Bank of Japan (BoJ) raised its policy rate to 1% or, the highest since 1995, in June, while the Bank of England (BoE) base rate is at 3.75%, leaving a differential of around 275 basis points (bps). Furthermore, investors remain worried about economic risks due to continued energy supply disruptions in the Strait of Hormuz, as Japan relies on the Middle East for over 90% of its crude oil. This further contributes to the JPY's relative underperformance against its British counterpart.
Apart from the aforementioned supportive fundamental backdrop, the strong move up could further be attributed to technical buying following the previous day's breakout through the 217.00 round figure. However, the daily Relative Strength Index (RSI) has moved to the verge of breaking into overbought territory. This makes it prudent to wait for some consolidation or a modest pullback before placing fresh bullish bets on the GBP/JPY cross and positioning for further gains.
Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.
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