Sterling extended its advance versus the yen to an 18-year high, rising more than 0.77% and pushing through the prior year-to-date peak of 216.60. The cross broke above 217.00 for the first time since January 2008 and was trading at 217.11 at the time of writing.
A bullish harami, or ‘inside day’, formed on Friday and momentum built after the pair cleared the 2 July high of day at 216.08. The Relative Strength Index is pointing higher and edging towards the 70 overbought level, which points to potential consolidation before any continuation. Resistance is seen around 217.50, then 218.00, with 220.00 as the next psychological barrier. On the downside, a reversal would require a move below 215.00, then the 3 July low of day at 214.72, with further supports at the 50-day Simple Moving Average of 214.09 and the 100-day SMA at 213.17.
Fundamental Drivers and Policy Divergence
Given the GBP/JPY has broken out to an 18-year high, we see the path of least resistance as upwards. The fundamental driver remains the sharp contrast between the Bank of England’s policy and the Bank of Japan’s stance. This policy divergence continues to fuel the carry trade, making long positions attractive.
We must consider the latest UK inflation data, which came in at a stubborn 2.8% last week, reinforcing the view that the BoE will not be cutting rates soon. This contrasts sharply with Japan, where core inflation remains subdued at 1.5%, giving the Bank of Japan little reason to abandon its ultra-loose monetary policy. This growing interest rate differential is the primary catalyst for the pound’s strength against the yen.
Trading Strategies and Risk Considerations
For the coming weeks, we believe buying call options with strike prices aiming for the 218.00 and eventually the 220.00 psychological level is a viable strategy. The ‘bullish harami’ pattern last Friday provided a strong technical signal that this upward momentum has legs. We should look to enter on any minor dips, using the strength of the trend to our advantage.
However, we must be mindful that the Relative Strength Index is approaching overbought territory. Historically, such extended moves, like the one seen before the 2008 financial crisis, can end in sharp reversals. Therefore, purchasing cheap, out-of-the-money put options with a strike below the 215.00 handle could serve as a prudent hedge against any sudden risk-off sentiment or unexpected policy shifts.
