GBP/JPY bounces at 155.00 once again, eyes retest of 156.00 if risk-on vibes continue

• In a choppy start to the year, GBP/JPY fell back from near-156.00 to 155.00 before bouncing to 155.50.
• If risk-on conditions continue, the pair may well retest 156.00, but does risk entering overbought conditions according to the RSI.

Things were bumpy for GBP/JPY on the first trading day of 2022. Despite a resolutely risk-on market bias (when looking at moves in global equity and bond markets, anyway), FX markets have been more mixed. The US dollar outperformed amid a surge in yields, but the yen also performed well while more risk-sensitive currencies faired badly, amid an apparent shift from risk into safe-havens. Analysts said that with many market participants in Europe and the Asia Pacific region still on holiday amid multiple market closures, traders shouldn’t read too much into Monday’s out-of-synch FX market moves.

Nonetheless, the safe-haven bid that support the yen at one point sent GBP/JPY below 155.00 from earlier highs near 156.00. The yen bid has eased somewhat in recent trade, enabling GBP/JPY to recover back towards the 155.50 mark, where it trades lower on the day by about 0.2% versus earlier losses of more than 0.5%. Monday’s price action confirms the 155.00 level as an important area of near-term support, having acted as a good intra-day buy level now for three successive sessions. If stocks and yields can keep on pushing higher as market participants express a sunnier take on the 2022 outlook as Omicron worries subside, short-term GBP/JPY bulls could push the pair back to 156.00.

Medium-term bulls should beware that any push past 156.00 could tip GBP/JPY into overbought territory. The 14-day Relative Strength Index (RSI) is currently at 66, close to the 70 level above which currency pairs are often viewed as overbought. Indeed, over the course of the last two weeks, the pair has rallied more than 4.0% (from under 150.00). Some consolidation might, thus, be in order, before the pair has a run at last year’s 158.00 highs. But with the BoJ as dovish as ever and the BoE likely to implement multiple further rate hikes in 2022, the risks this year are to the upside.