GBP/JPY slumps back to 154.00 level as risk-off flows, weak UK data hit sterling and lower yields, safe haven demand help yen

• GBP/JPY dropped 0.7% on Friday, falling from above 155.00 to around 154.00.
• Risk-off flows and soft UK data weakened sterling while safe-haven demand and lower global bond yields strengthened the yen.

GBP/JPY fell sharply on Friday and heavy downside in the global equity market and commodity space weighed on more risk-sensitive currencies such as sterling, whilst a sharp drop in global bond yields on safe-haven demand boosted the rate-sensitive yen. Much worse than expected UK Retail Sales figures for December made things worse for GBP and, though it wasn’t the worst performing G10 currency on the day, it fell 0.7% against the yen, which was the second-best performing G10 currency after its safe-haven counterpart the CHF. The net result for GBP/JPY was that it dropped sharply from above 155.00 all the way to 154.00 where it is currently stabilising ahead of the weekend FX market close.

After GBP/JPY broke below the 155.50 level on Thursday, above which it had been consolidating within a descending trendline for the past few sessions, the pair’s technical momentum has taken a marked turn for the worse. As poor earnings and Fed tightening fears drive losses in US (and global equities) that may continue into next week, GBP/JPY bears will be eyeig a test of the 50 and 200-day moving averages in the 153.00 to 153.40 area ahead of key support in the 152.50 zone. Amid a lack of notable economic events to distract from these themes, aside from maybe flash UK January PMIs on Monday, fundamental catalysts for GBP outperformance are few and far between. The BoE will probably hike interest rates again in February, which might reignite some GBP/JPY upside on central bank divergence, but this could still be some weeks away.