The reasons for GBP optimism have grown. Bank of England’s Vlieghe has taken a more hawkish shift from his neutral perspective. There is a £150 billion in pent up savings and at least some of that is expected to be released into the UK economy as expectations are growing the UK will be out of more lockdown measures. 75% of the UK population has at least one dose of the vaccine. UK services PMI surprised to the upside yesterday coming in at 62.9 vs 61.8 expected. The UK and EU have reached a deal on joint fishing stocks for 2021.
This should support the GBP going forward into the BoE’s meeting at the end of June were expectations of a hawkish taper are growing.
The JPY has a fundamental bearish bias as the general risk tone is positive. The large amount of COVID-19 vaccines being rolled out across the globe is providing a supportive environment for prolonged JPY weakness. As a safe-haven currency, the market’s risk outlook is the main driver of JPY. Japanese economic data rarely prove market moving and safe-haven flows are typically the more dominant factor for the JPY. Currently, they favour weakness.
Therefore, there is a near term buying bias for the GBPJPY on breakouts and pullbacks.
Key Trade Risks:
- The main risk to this trade is from any risk-off tones which will strengthen the JPY.
- A breakdown in the fast UK economic recovery will also invalidate this outlook.
- The emergence of a COVID-19 vaccine-resistant variant in the UK will invalidate this outlook.