The Sterling has appreciated almost 8.5% against the Japanese yen since May 12, and the steep climb may have begun to look overdone as the price retraces back for the past days.
The Bank of England (BOE) hiked its benchmark interest rate by 25-basis points during its policy meeting on Thursday to balance the risk of high inflation, but the concern that the UK economy may face a considerable risk of stagflation particularly as consumer confidence falls to record lows remains. UK GDP for April also posted a surprise contraction of 0.3% marking its second consecutive month of negative growth. Political uncertainty and the dovish tone seen in their previous meeting with all these factors may have a negative impact on the GBP.
The Bank of Japan (BOJ) is up next with its policy meeting to take place in the lead into Friday. Japan’s finance minister Shunichi Suzuki said this Tuesday that they are monitoring the forex market with a greater sense of urgency and is poised to act if necessary. The BOJ’s shares concerns with the government over JPY’s rapid depreciation and potentially judging JPY weakness as no longer positive for Japan’s economy.
Looking at the current price action on the daily chart, we can see that a double top pattern with a bearish RSI divergence hitting the upper trend line resistance of the WM channel gives us a signal of a bearish pullback and is now currently sitting at the middle trend line which acts as a minor support. A sustained break at this point could mean the pair potentially target a lower trend line area of the WM channel at around 156.50 area.
Looking at the bigger picture, we can see that the current trend is still slightly bullish even in a case of deep pullback towards 156.50 area, and a long-term bullish signal will be if the pair bounces back to WM channel support zone.