GBP Fundamentals:

• The British pound (GBP) is under pressure due to slowing economic growth and expectations of accelerated Bank of England (BoE) rate cuts.
• UK GDP growth for Q2 was 0.5%, lower than the predicted 0.6% and down from 0.7% in the previous quarter, signaling a slowdown.
• Jobs data and wage growth are softening, further supporting the likelihood of more aggressive rate cuts by the BoE.
• Market expectations:
  • Cuts expected in November and December 2024.
  • Further cuts may bring interest rates down to 3.25% by mid-2025.
• Bearish Outlook: The pound is likely to weaken further, especially as the UK economy slows.

JPY Fundamentals:

• The Japanese yen (JPY) is typically a safe-haven asset in times of geopolitical uncertainty, but recently it has been driven by domestic factors.
• The Bank of Japan (BoJ) remains slightly hawkish, with some officials noting downside risks to the economy.
• Recent market movements:
  • Nikkei has rebounded after recent selloffs.
  • Short-term JPY swap rates are falling, reflecting some economic uncertainty.
• New Prime Minister Sanae Takaichi is focusing on fighting inflation, adding complexity to JPY’s outlook.
• JPY Strengthening: The yen could strengthen if geopolitical risks increase, especially as the BoJ remains more hawkish than market expectations.

GBP/JPY: The GBP is facing downward pressure from anticipated BoE rate cuts, while the JPY could strengthen as it remains a safe-haven asset during times of geopolitical risk or market uncertainty. The weakening economic outlook for the UK, combined with a more resilient JPY, sets the stage for a bearish case for GBP/JPY. With both currencies facing contrasting fundamental drivers, a downward move for the pair is anticipated, especially if risk sentiment favours the yen and BoE rate cuts accelerate.

Technical Analysis: GBP/JPY – Top-Down Approach

Daily Timeframe: Bearish Trend Emergence

On the daily chart, GBP/JPY has been on a notable uptrend but is now showing signs of a potential reversal. The recent price action highlights a clear breakdown from previous highs, which signals exhaustion in the bullish momentum.

• Descending Channel Formation: The price has formed a descending channel, with clear lower highs and lower lows, suggesting that the pair is in a corrective phase. This pattern aligns with the fundamental backdrop, pointing toward a bearish continuation.
• Key Support at 183.000: The first major support level is near the 183.000 mark, which aligns with the bottom of the channel and a significant key level identified from previous price reactions. This target is critical as it represents the midpoint of the current downtrend.
• Medium-Term Target at 179.000: Looking further out, if the bearish momentum persists and the fundamentals continue to favor the JPY over the GBP, a move towards the 179.000 level is highly plausible. This level corresponds to the January 2024 support, where previous accumulation took place. The pair could test this level before finding substantial buying interest.

Lower Timeframe Analysis: Impulse-Correction-Continuation

Zooming into the lower timeframes (1H and 4H charts), we can see a classic impulse-correction-continuation sequence developing, which further supports the bearish outlook:

• Sharp Impulse Move: Following the recent peak near 195.500, GBP/JPY experienced a strong sell-off, indicating a shift in market sentiment. This downward impulse shows that sellers are firmly in control.
• Correction Phase: After the initial drop, the pair entered a corrective phase, characterized by a retracement back toward the 192.000 level. This retracement appears to be temporary, and price action suggests that it is setting up for a further downside move.
• Continuation Setup: The correction was sharp but short-lived, and price action is now showing early signs of a continuation to the downside. This textbook impulse-correction-continuation structure points to further declines, aligning with the broader downtrend seen on the daily chart.

Final Target Projections

• Initial Target – 183.000: Given the current technical structure and the confluence of the descending channel’s lower boundary, the immediate target for GBP/JPY is just above 183.000. This level also represents the 50% Fibonacci retracement level from the January lows to the recent high, adding further technical significance.
• Extended Target – 179.000: Should the pair break through 183.000 decisively, the next major support is at the 179.000 level, which corresponds to a key structural low from early 2024. This level would be the ultimate target in a sustained bearish scenario.

Conclusion

Both fundamental and technical factors support a bearish outlook for GBP/JPY in the near term. On the fundamental side, the BoE’s expected rate cuts, combined with a cooling UK economy, will likely weigh on the pound. Meanwhile, the yen’s safe-haven status and relatively hawkish BoJ provide support for the JPY. Technically, the pair has already entered a corrective phase, and all signs point to further downside, with 183.000 and 179.000 being the key levels to watch.

For now, the focus remains on how GBP/JPY reacts to the 183.000 support level. Should price break below this area, the decline to 179.000 seems highly probable. Traders should keep an eye on geopolitical developments and BoJ policy changes, which could further tilt the scales in favor of JPY strength.

FAQs

• What is the immediate target for GBP/JPY?
  • The immediate target is around 183.000, a key support level.
• What could trigger further downside for GBP/JPY?
  • Accelerated BoE rate cuts and increased geopolitical risks favoring JPY could drive the pair lower.
• What is the long-term target for GBP/JPY?
  • The next major support level is at 179.000, corresponding to the January 2024 support.
• Why is the yen gaining strength against the pound?
  • The yen is gaining strength due to safe-haven demand and hawkish signals from the BoJ, while the pound weakens on expectations of BoE rate cuts.
• How does the technical outlook support the bearish case for GBP/JPY?
  • The technical analysis shows a clear impulse-correction-continuation pattern, pointing to further downside. Key levels are 183.000 and 179.000.
• What role does global risk sentiment play in GBP/JPY?
  • A worsening in global risk sentiment would likely increase demand for JPY, adding bearish pressure on GBP/JPY.