Carry trades haven’t exactly been at the forefront of investors minds across the FX space in Q4 amid a sizeable unwind in reflation trades. However, should we see risk sentiment stabilise in the new year, and GBP/JPY can once again look to rate differentials for direction.
GBP/JPY vs GB/JP 10Y Differentials
A look at past BoE hiking cycles shows GBP/JPY has had a tendency to grind higher with a hit rate of 83%. What’s more, with Commitments of Traders (COT) report data highlighting that traders are more bearish on GBP than they have been in over two years, there is fuel for a short squeeze to prompt a reprieve in the Pound. The risk, however, is the rise in political instability with government officials unable to keep themselves out of the limelight for the wrong reasons. To add to this, money market pricing is also a worry for the Pound, given how aggressive markets are priced for BoE tightening.
On the technical front, key support is situated at 148.50-149.00, failure to hold would negate the view of GBP/JPY upside. Topside targets are for 153.00-50.
GBP/JPY Weekly Chart