GBP/JPY rebounds from 139.00 lows, but sterling still struggling

• GBP/JPY has rebounded sharply from earlier lows of beneath the 139.00 level to above 139.50.
• However, GBP is still struggling as Brexit optimism fades and is the worst performing G10 currency.

GBP/JPY has recovered sharply from sub-139.00 lows set shortly before the 14:30GMT US cash open. Currently, the pair trades around the 139.70 mark, but still trades with losses of just under 30 pips, or just over 0.2% on the day.

GBP struggles as Brexit hopes fade

A number of negative headlines regarding the state of Brexit negotiations on Wednesday have undermined hopes for a deal to be reached by the end of this week. Around the time of the EU cash open (08:00GMT), an EU diplomat said that EU Chief Brexit Negotiator Michelle Barnier told EU envoys that differences still remain on the three key sticking points (a reference to the standout issues of fisheries, state aid and governance) and that a deal “still hangs in the balance”.

GBP/JPY subsequently dropped below 1.3400, as Tuesday’s optimism about the two sides entering “the tunnel” and hopes for a deal by the end of the week were priced out. The pair then saw an extension of downside around European midday when the Times reported that France and other hard-line countries are pushing for a no-deal Brexit if Britain will not make concessions, hitting lows beneath 1.3900.

Dip buyers came in aggressively, however. Indeed, despite today’s not-so-upbeat news on the state of talks, most analysts still suspect a deal will be reached given how strongly it is in the interest of both the EU and UK not to deal further damage to their Covid-19 stricken economies.

GBP/JPY prices continue to squeeze within wedge pennant

GBP/JPY’s price action on Wednesday is consistent with a continued squeeze within a medium-term wedge; since the beginning of November, GBP/JPY has trended higher and respected well the trendline linking the 30 October, 5, 6, 19, 27 and Wednesday November lows. To the upside, prices have failed to break substantially above the 140.00 mark; prices nudged marginally above the 11 November high at 140.33 on Wednesday morning.

With prices consolidating in such a way, an eventual break in the near-term future is becoming increasingly likely. Should a break occur to the upside, that would set the stage for an eventual move higher towards the 142.70 yearly high set back on 1 Sep. Should the wedge break to the downside, that would open the door to a test of 29 November lows in the 138.20s, which also coincides well with the pair’s 21-day moving average (DMA). Below that and beyond the psychological 138.00 level is the 19 November low in the 137.10s, an area of resistance that comes into play just above the pair’s 50DMA at 137.08.

GBP/JPY four hour chart