GBP/JPY pulls back to 155.60 amid stock market weakness after failing to hold above 156.00

• After briefly moving back above 156.00, GBP/JPY fell back to 155.60 in recent trading, following the stock market’s downward trend.
• If risk appetite remains strong ahead of next week’s Fed meeting, the GBP/JPY pair may remain under pressure.

The GBP/JPY spent most of Wednesday’s session trading sideways within the 155.50 to 156.20 range, with the 21-day moving average and last Friday’s lows around 155.50 offering substantial support. Higher-than-expected UK December consumer inflation figures during European trade combined with comments from BoE Governor Andrew Bailey at the US open failed to support the pair above 156.00. Despite the governor appearing very concerned about inflation and saying nothing to dampen expectations of a 25bp rate hike next month, the GBP/JPY has pulled back to 155.60 and points to a test of the session lows.

The move lower in the pair likely reflects more losses in the US equity space, with major indices currently between 0.1-0.5%. Investors remain concerned about the prospect of a rapid tightening of monetary policy by the Fed, which is expected to start in March. The stock market slump since the beginning of the year (the S&P 500 is down more than 4.0%) has affected risk-sensitive JPY crosses such as GBP/JPY. The pair trades sideways on the day about 1.3% below recent highs near 158.00. Risk appetite may remain strong ahead of the Fed meeting which is anticipated to be very aggressive next week.

That suggests that it makes sense for GBP/JPY to remain in its recent downtrend channel for now, which suggests a break below the 21 DMA and a test of support at 155.00 this week seems likely. Risk appetite will need to see a broader stabilization for GBP/JPY to trade back based on central bank divergence, which would play a decisive role in the pair moving higher. Friday’s December CPI figures from Japan and December UK Retail Sales are unlikely to have much of an impact.