Late January saw a substantial rally for GBP/JPY that lifted off from nearly a two-year, hammer candle low around the 164.00 support target. This rally was extended at the end of January by the Bank of Japan’s interest rate cut into negative territory, which prompted the Japanese yen to depreciate sharply.
As a result, the GBP/JPY currency pair reached a high just shy of 175.00 in the beginning of February, but then abruptly reversed course to the downside and plummeted for most of the past week.
This bearish reversal for GBP/JPY has been driven largely by accelerated buying of the safe haven Japanese yen in response to greatly heightened volatility in the global stock markets, coupled with a generally weak British pound that has been weighed down by an increasingly dovish Bank of England.
As it currently stands, the currency pair has given back virtually all of the gains made during the rally of late January, and has approached a retest of the noted 164.00 support level. This has effectively created a potential double bottom pattern right at a major support level, placing GBP/JPY at a critical technical juncture.
In the event that global equity markets quickly stabilize and the yen pulls back, a bounce at or near 164.00 support could occur. In this case, the double bottoming formation may indeed fulfill its conventional function as a reversal pattern, sending GBP/JPY higher. In a slightly more likely scenario, however, continued stock market volatility that sustains a “risk off” market sentiment could lead to further yen buying. When coupled with a persistently pressured British pound, this potential yen strengthening could lead to a GBP/JPY breakdown below 164.00 support. In this event, which would confirm a continuation of the current downtrend, the next major downside target is at the 160.00 psychological support level.