British Pound May Fall vs Yen on Real Rates, Chart Break

GBP/JPY STRATEGY: BEARISH

• British Pound rejected at resistance near 158.00 versus the Japanese Yen
• Clearing support near 156.00 may bring on a test of the 154.16-74 region
• Market-wide focus on inflation, real interest rates may fuel Yen strength

Worries about rising inflation and central banks’ response to it have dominated conversations around global financial markets lately. Price growth levels unseen in decades are proving to be stickier than global policymakers initially communicated, triggering a hawkish pivot.

This has put real interest rates – nominal yields less the expected price growth rate – into the spotlight. Investors are understandably keen to tailor portfolios so as to insulate returns as much as possible from the swelling inflationary haircut.

The Fed is understandably at the forefront of speculation considering its outsized influence on borrowing costs worldwide, thanks to the uniquity of the US Dollar in international commerce. The Bank of England (BOE) is not far behind however. Four rate hikes at 25bps each are now fully priced in for 2022.

YEN ENJOYS REAL-YIELD ADVANTAGE OVER BRITISH POUND

That follows a swift hawkish adjustment in the markets’ BOE policy bets since early December, which has pulled nominal yields sharply higher while inflation expectations pulled back. While this has driven real UK rates higher, they remain deeply negative. The 5-year inflation adjusted yield is -3.21 percent.

A similar dynamic has played out globally, including in Japan. Decades of structurally low inflation have kept expectations paltry relative to other top economies. While the real yield here is also negative, it is far less so than that of the UK at just -0.6 percent. This gives the Yen an advantage of 2.6 percent.

It seems likely that the markets are about done pricing in the BOE’s appetite for near-term tightening, at least for now. The next BOE meeting is two weeks away, and no top-tier economic data releases threaten the outlook in the interim. That might allow capital flows to be drawn to the Yen’s relative store-of-value appeal.

GBP/JPY TECHNICAL ANALYSIS

The technical picture seems supportive of the bearish GBP/JPY view that this reasoning implies. Prices fell backfrom familiar resistance near the 158.00 figure,slipping below support centered on the 156.00 mark. A drop to test the 154.17-64 area may follow.

GBP/JPY daily chart created with TradingView

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--- Written by Ilya Spivak, Head Strategist, APAC at DailyFX.com

Follow and contact Ilya via Twitter @IlyaSpivak