Japanese Yen Benefits From Risk Aversion, British Pound Extends Decline

The Japanese Yen strengthened across the board as investors scaled back their appetite for risk, and is the best performing currency against the greenback on Tuesday, with the exchange rate slipping to a low of 89.63. The USD/JPY has bounced back during the North American trade and remains 40pips lower on the day after moving 78% of its average true range, and the pair looks poised to cross back above the 120-SMA at 90.04 going into the Asian session as the 30-minute RSI rebounds from oversold territory. However, as the USD/JPY maintains the downtrend from the 2007 high (124.13), we are likely to see price action hold below the 200-Day SMA at 91.94, but a shift in risk trend could lead to a major breakout in the pair as the global recovery gathers momentum.

The British Pound extended the decline from earlier this week and slipped to a low of 1.4937 as Fitch Ratings held a cautious outlook for the U.K., and the exchange rate may continue to trend lower going into the Asian trade as the U.S. dollar continues to benefit from the rise in safe-haven flows. The GBP/USD is 80pips lower from the open after moving 78% of its daily ATR, but it appears there is a short-term correction in the exchange rate as the 30-minute relative strength index climbs out of oversold territory following the rebound from the daily low. Nevertheless, as the daily RSI maintains the downward trend initiated from January, the bearish momentum could lead the pair to test the yearly low at 1.4782 as policy makers continue to see a risk for a protracted recovery. At the same time, the Bank of England minutes due out next week are likely to spark increased volatility in the British Pound cross rates as investors weigh the prospects for future policy, and we may see the exchange rate hold a narrow range throughout the week as market participants speculate the central bank to maintain a dovish outlook for inflation.

Join us to discuss the outlook for the major currencies on the DailyFX Forums

To discuss this report contact David Song, Currency Analyst: dsong@fxcm.com