What is GBP/JPY?
GBP/JPY is the currency pair that shows the value of the British Pound against the Japanese Yen. The left side of the pair is called the base currency, in this case the GBP, and the right side is called the quote currency, in this case the Japanese Yen. This exchange rate tells you how many Yen you need to buy one British Pound. For example, if the GBP/JPY pair is trading at 171.30, it means that you need 171.30 Yen to buy one British Pound. So, when the pair is going up in price, the British Pound is said to be appreciating or getting stronger and the Japanese Yen is depreciating or getting weaker, and vice versa when the pair is going down in price.
What are the most important GBP/JPY charts for traders to follow?
There are different ways you can display the exchange rate price movements on a chart. The most common ways include a line chart or a bar chart, but the most popular and used one is the candlestick chart. The candlestick chart shows you instantly and in real time where the price has opened, closed and how much up and down it went on any given timeframe.
Let’s say you want to check GBP/JPY price on a daily timeframe. You go to your charting software, select the timeframe and select the candlestick chart (if it’s not set by default). This is what you would see on tradingview.com
Is GBP/JPY a good pair to trade for beginners or advanced traders?
GBP/JPY can be a very good pair to trade when you have a monetary policy divergence between the two central banks backing the currencies, the Bank of England (BoE) for the GBP and the Bank of Japan (BoJ) for the JPY. For example, if the Bank of England is raising interest rates and the Bank of Japan is keeping them at zero, then you have a policy divergence and, in such cases, you would see the relative currency pair appreciate or going up. Moreover, the JPY is considered a safe haven currency and it sees inflows when there’s risk aversion in the market. This makes JPY pairs sensitive to the risk sentiment and you will see GBP/JPY going up when there’s risk on sentiment and going down when there’s risk off sentiment.
What session is best to trade the GBP/JPY?
The best times to trade GBP/JPY is during the European and North American Session. This is because in the Asia-Pacific (APAC) Session there’s less volume and even though the news for Japan is released in the APAC session and can offer good trading opportunities, the movements get extended during the next two major sessions.
Moreover, in the European session you get the news and events for the British Pound and in the North American session the news for US. US news are always the most important as the US is the biggest economy in the world and it can single-handedly spur global growth or bring the whole world into a recession as we saw in the 2008 with the Global Financial Crisis (GFC). The Federal Reserve is also the most important central bank in the world. That’s why US news move the GBP/JPY pair even though there’s no USD in the pair.
Is the GBP/JPY an important cross?
GBP/JPY is a popular currency pair among retail traders due to its volatility. The Yen strength though is important for the Japanese because the Japanese economy is export oriented and the value of the Yen can impact different things from the profits companies earn to the inflation rate in the overall economy. The Japanese prefer a weak Yen because it increases exports, but they don’t like an appreciation or depreciation that is too fast and goes on for too long. If the GBP is getting stronger against the Yen, then it increases the purchasing power of British consumers and businesses who can buy more Japanese goods and services. On the other hand, a strong Yen decreases the purchasing power of the British people who may want to buy less Japanese stuff and therefore decreases Japanese exports.
Will GBP/JPY go up or down?
In the current context of monetary policy divergence between the Bank of England hiking rates and the Bank of Japan keeping them at zero and doing quantitative easing (QE), the GBP/JPY pair rallied for years now. Since the trough in 2020 to the current level, the pair appreciated more than 37% and more than 15% since the divergence started to become clear when the BoE made its first rate hike in December 2021. But what are the reasons for JPY to appreciate when inflation starts to clearly ease, and the global growth outlook worsens even more? I think the central banks will keep on tightening even during the recession and that will weigh on growth. This will lower inflation and maybe even lead to some deflation. In turn the central banks will respond with rate cuts and that expectation will void the monetary policy divergence. The Yen safe haven status coupled with the unwinding of the carry trades we saw up to now on policy divergence, will lead to more and more appreciation.
How has Brexit affected GBP/JPY?
In 2016 there was already some bad economic outlook due to the Fed hiking interest rates with the S&P500 ranging for a year since 2015 to 2016. The JPY was already appreciating due to this prevailing economic outlook but what happened in June 2016 will be in the history books of FX trading. After the British people voted to leave the EU in the Brexit Referendum the GBP fell off a cliff. The GBP/JPY pair depreciated for more than 15% or 2680 pips in a single day. This was due to the expectations of the market that Brexit would be bad for the British economy and the Bank of England would soon cut interest rates. In fact, less than two months later the BoE indeed cut interest rates.
In what ways does volatility affect GBP/JPY?
The GBP/JPY pair is one of the most favourite retail traders’ pair to trade due to its high volatility. This is because the pair is sensitive to risk sentiment, so when there’s risk aversion in the market you can generally see the JPY appreciate and when there’s risk taking sentiment in the market you can see the GBP getting bid. Volatility is often seen in a bad way and associated with stress in the market. So, when traders talk about high volatility, they generally mean it in a negative way. In reality volatility is neutral, it works both ways, it just shows how much a pair moves in a given period compared to a benchmark. Volatility also picks up during important events be it some news, a central bank meeting or some kind of global event. In such instances you will see the pair move faster and it will require more focus on the risk management side.
How to trade GBP/JPY?
The best way to trade currencies in general is to have a fundamental idea for direction, which is generally based on macroeconomics such as central bank’s monetary policy, growth, inflation and so on, and technical analysis for risk management. For example, let’s say that you have the monetary policy divergence between the Bank of England and the BoJ telling you that fundamentally the pair should go up. So, you will want to mainly take long positions. You also need to manage your risk though. Where can you enter in order to have a small risk exposure but a bigger profit potential? You can use technical analysis.
So, you open the GBP/JPY chart and use technical concepts like support and resistance, trendlines, indicators and so on to decide where to open a trade. For example, in the chart below you can see how you could use the previous swing level as support, and you also had confluence with a Fibonacci level (50%) and a 100 exponential moving average (EMA). You could have placed an order when the price touched the confluence zone and a stop loss below the moving average or for a more conservative strategy below the 61.8% Fibonacci level. The possible gain could have been more than two times higher than what you risked.
Where can I trade GBP/JPY?
You can trade GBP/JPY or any other Forex pair with a broker. Always choose a good, reputable and regulated broker to avoid unnecessary problems. When you open a trading account with a broker, you will have to deposit money to be able to trade and then use the broker trading platform to execute your trades. Most retail brokers let you trade on MetaTrader 4 or MetaTrader 5, which are two of the most famous and popular trading platforms among retail traders. Most retail brokers offer CFD trading for Forex, although you can also trade GBP/JPY via other derivatives like futures or options that are more expensive than CFDs.
GBP/JPY correlation
What drives the GBP/JPY pair the most is monetary policy divergence between the BoE and the BoJ and risk sentiment. In normal times, when there’s risk on sentiment you can see the GBP/JPY appreciating all else being equal, while during risk off flows you can see the JPY gaining strength. The other driver as previously mentioned is monetary policy divergence. This divergence increases or decreases the so-called yield spread, which is the differential between British Government Bonds returns versus the Japanese ones. Investors generally want the highest profits for the least amount of risk.
So, when the British yields are rising, investors prefer to buy British assets which means selling Yen and buying British Pounds and vice versa when yields in UK fall or the Japanese ones rise. In the chart below you can see how the GBP/JPY pair is correlated with the spread between the UK and JP bond yields.
You can also see the correlation that shows how the JPY pairs are sensitive to risk sentiment by comparing GBP/JPY to other JPY pairs. In the example below you can see the correlation between GBP/JPY, EUR/JPY and CAD/JPY. Notice how they all look similar.
