GBP / JPY Consolidates At 155.00 After Technical Sell, BoE Meeting Coming

• GBP / JPY is consolidating between 155.00 and its DMA of 21.
• The cross recently broke down from a descending triangle formation.
• The Bank of England meeting could spark volatility on Thursday.

The GBP/JPY it has spent most of Tuesday’s session consolidating near the 155.00 level and its 21-day moving average at 155.35. Since falling below support at the 156.00 level on Monday, the pair has been trading on a negative bias, although the drop seen on Tuesday has more to do with the overall strength of the yen than it did on Monday, which had more. to do with the overall weakness of the British pound over time as a result of Brexit tensions and uncertainty regarding the Bank of England’s rate decision this week.

As for why the yen is performing well on Tuesday (it is the best performing G10 currency on the day), it is probably because long-term bond yields in developed markets (particularly in Europe) have reversed, thus putting downward pressure on Japanese bond interest rate spreads. For reference, US 10-year yields are consolidating near recent lows around 1.55%, while German 10-year yields have fallen dramatically from above -0.10% on Monday to current levels. of around -0.17%.

For the GBP / JPY, some technical selling could also be in play; The pair formed a descending triangle in recent weeks, with support at 156.00 and a downtrend linking the October 20, 26 and 29 highs. These patterns are usually indicative that a downside break is looming.

Bank of England in the spotlight

Looking ahead to the rest of the week, the fundamentals will take precedence again; the main event for GBP this week is Thursday’s meeting of the Bank of England. While UK money market prices would suggest that a rate hike of at least 15 basis points is almost a certainty, economists are more divided, as apparently is the BoE’s rate-setting committee (called the BoE Committee). Monetary Policy or MPC).

To summarize the differences of opinion; Hardline members of the BoE (including Governor Andrew Bailey and chief economist Huw Pill) have raised concerns that if the BoE begins to take its foot off the “accelerator” (that is, it begins to shed ultra-accommodative politics ) with year-on-year consumer price inflation rates highs for the year (and likely to exceed 5.0% in 2022) and the output gap now closed (i.e. the economy has recovered to its pre-pandemic size), medium-term inflation expectations run the risk of undoing. On the contrary, the moderate members have argued that the bank should have until December so that the bank can properly observe the impact that the end of the government’s licensing scheme had on the labor market.

Some analysts have pointed out that given recent aggressive rhetoric from the Bank of England governor and others that has boosted market expectations of rate hikes in November, the bank could face credibility problems if it fails to meet these expectations. The vote on interest rates is likely to be split with the four known hawks voting for an immediate 15 basis point increase, while the three known pigeons could vote to keep rates at 0.1%. That leaves two MPC members who can decide the outcome, with only one needing to vote for the walk to set it in stone. Note that the bank will vote on whether or not to continue with its bond purchase program until the end of the year.

The BoE will publish its quarterly Monetary Policy Report, which contains its latest economic forecasts. Some have suggested that there is a risk that new long-term inflation forecasts suggest a less aggressive bull cycle for the Bank of England than money markets are currently pinning; Short sterling futures suggest more than 100 basis points of rate hikes in 2022. Some have suggested that the bank might try to minimize the aggressiveness with which it plans to raise interest rates in the coming years verbally as a way to to attract the more moderate members of the MPC.

Either way, the higher-than-usual uncertainty surrounding the meetings suggests that the reaction in GBP pairs like GBP / JPY could be very oscillating. Note that UK Brexit Minister David Frost and French Secretary of State for European Affairs will also meet on Thursday to discuss fisheries, as both sides try to prevent tensions from escalating into a trade battle. / full-fledged legal.