GBP/JPY outlook: Technical analysis & how to trade this currency pair

The pound and the yen appreciated from a weaker US dollar at the beginning of this year. Up 6.4% and 7.8%, respectively, against the greenback, it has been a volatile year for both currencies.

Volatility plays a central role when analyzing the GBP/JPY pair. The two currencies often respond to distinct drivers due to contrasting monetary policies set by their central banks and separate regional influences that shape market behavior.

The Bank of Japan has been using a yield curve control to force a weaker yen, aiming to boost the Japanese economy with lower yields across all bond tenures. This helps Japan’s export-based economy and stimulates inflation, which has been below the BoJ’s target of 2% for most of the period since 2013.

On the other hand, inflation in the UK has remained persistently above the Bank of England’s 2% target between 2022 and 2024, leading the central bank to implement a series of rate hikes. Unlike the Bank of Japan’s cautious stance, the BoE has taken a more hawkish approach, prioritizing inflation control over growth support. While recent data suggests price pressures may be easing, the BoE maintains a vigilant tone, signaling that policy will remain tight until inflation shows consistent signs of retreat. The April 2025 inflation print came at 3.5% from 2.6% the prior month, while the Bank of England aims at a long-term inflation of 2%.

A significant divergence in central bank interest rates has strengthened the pound against the yen over the past five years. Investors frequently engage in what’s known as a carry trade — borrowing in yen at low interest rates and investing in pound-denominated assets to capture yield differentials. However, this trend tends to reverse when interest rates are projected to decline, particularly as Western central banks adopt a more dovish stance. The shift is often amplified by rising geopolitical tensions, which trigger risk-off sentiment.

The interest rate differential has significantly impacted the GBP/JPY currency pair. Since the peak of Covid-19 fears in March 2020, which coincided with global interest rate lows, the pound has appreciated nearly 70% against the yen.

This trend began to shift around July 2024, with highs on the pair of 208.120, as markets priced in Bank of England rate cuts when the Bank of Japan announced its intention to move away from its negative interest rate policy.¹

GBP/JPY has been off its previous year highs, the yen appreciating from an increasingly more hawkish central bank, while the BoE is being priced more dovish. The pair has been trading in a big range since September 2024 while markets await further central bank policy announcements. The weekly RSI is neutral, as observed in the charts.

Key levels to look out for:

• Weekly resistance zone – 196.00 to 199.50
• Weekly support zone – 184.00 to 187.00

Long-term bulls will expect to pursue the rally in the pound that started in April 2025 towards the highs of the channel – this same rally brought the pair back from a bearish breakout into the secular upward channel.

Long-term bears, on the other hand, will expect a rejection from the resistance zone at least towards the low of the weekly range. A break-retest of the weekly support zone would indicate a reversal of the past 5-year trend.

The daily chart offers a more detailed view of the underlying drivers behind the pair’s movement. As indicated by the first arrow in the chart above, the carry trade appeared to reach a climax when prices topped out at 208.120, followed by a sharp reversal. This shift coincided with market expectations of an initial round of interest rate cuts from major central banks after prolonged tightening cycles.

The second arrow reflects an amplified version of the initial move, driven by deeper pricing of rate cuts and heightened geopolitical tensions in the Middle East. This escalation led to a sharp selloff, with major equity indices gapping lower over three consecutive sessions in August 2024.

Since then, price action has remained largely range-bound, respecting the previously identified support and resistance levels. A noteworthy technical feature is the descending trendline emerging from the November 2024 highs.

From a bearish perspective, the 190.00 level is a key psychological threshold, aligning with the lower boundary of the broader ascending channel. For bulls, continued support within the current range could signal another leg higher, with potential for a breakout above the established resistance zone.

To trade GBP/JPY, be aware of different central bank policy announcements from the Bank of Japan and the Bank of England, which has recently started cutting rates cautiously.
It is also always valuable to monitor general market sentiment and global inflation rates, as the theme of other central banks cutting and differing tariff treatments with the US, will add to the currency pair's volatility.

In terms of technicals, monitor a breakout of the weekly range introduced on the weekly chart earlier in the article.

Footnotes:

¹https://www.efginternational.com/insights/2024/bank_of_japan_exits_its_negative_interest_rate_policy.html

²https://www.tradingview.com/broker/OANDA/

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Opinions are the authors; not necessarily those of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors.

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