Trading the GBP/JPY Currency Pair like a Professional

Trading the GBP/JPY Currency Pair like a Professional 

Reading time: 7 minutes

Made up of the British pound (GBP) and the Japanese yen (JPY), the GBP/JPY currency pair is a commonly traded cross, popular for its elevated volatility and high liquidity. Interestingly, behind the US dollar (USD) and the euro (EUR), both the GBP and JPY are the most traded currencies globally, according to currently available data.

How a professional trader trades the GBP/JPY exchange rate and the Forex market as a whole can be attributed to several aspects. Having a solid trading plan in place, adhering to trading strategies that focus on a blend of technical analysis and fundamental analysis, and a strong understanding of risk management as well as how the trading mindset operates are some of the most desired traits. 

What Drives the GBP/JPY?

  • The currency market is the largest financial market in the world and, as you can imagine, is driven by a multitude of factors, including monetary policy. The guidance delivered by central banks and expectations of where interest rates are headed are the main drivers behind market sentiment (for the GBP/JPY, the focus is on the Bank of England [BoE] and the Bank of Japan [BoJ]).
  • Economic indicators will be next on the list of importance for Forex traders. Once traders understand where the central banks stand (hawkish or dovish), they will commonly look to important macroeconomic aggregates out of the UK and Japan (largely defined by what the central bank is monitoring) to trade into or out of these risk events (a risk event is a term used to describe economic indicators that can impact the Forex market as well as other financial markets). This can cause substantial movement in the GBP/JPY, particularly on broad deviations from actual and expected data. 
  • Geopolitics, or geopolitical risk, can also have a drastic effect on the currency market. Unfortunately, this is difficult for traders to gauge and trade as these events are often unscheduled and create uncertainty, thus, causing choppy price movement. Geopolitical risk can be in the form of things like political unrest, war and regime changes. 
  • Technical levels may also influence the GBP/JPY currency pair, particularly levels/areas on the higher timeframes which is obvious for everyone to see. A noticeable area of resistance on, say, the daily timeframe, can prompt traders to unwind long (buy) positions as the pair closes in on the zone and also encourages traders to open fresh short (sell) positions. 

How do Professionals Trade the GBP/JPY?

Some technical analysts are gifted with the art of determining supply and demand through a price chart, void of the need for a macroeconomic perspective (other than being aware of the upcoming high-impacting data out for a specific day/week). However, many professional traders prefer to follow both macroeconomics and technical analysis to determine high-probability trading opportunities in the GBP/JPY. 

One common trading strategy is to trade out of a risk event. This involves understanding the guidance from the respective central banks and trading economic releases that align with this guidance. So, for instance, if the BoE wants to see more evidence of inflation slowing before cutting its Base Rate, traders will short currency pairs such as the GBP/JPY and GBP/USD (and long EUR/GBP) on lower-than-expected inflation numbers out of the UK on the back of this (usually with the help of technical analysis to determine entry into the market and assess risk management [this might include things like price action, chart patterns and the use of technical indicators]). This is because as inflation shows evidence of slowing, the expectation that the BoE could eventually cut rates would decrease demand for the GBP. 

Another way of trading the GBP/JPY Forex pair is known as trading into the risk event. Unlike trading out of the event, trading into an event involves taking a position before the release of possibly high-impacting economic data based on the market’s consensus (usually in the form of a median estimate) and previous data. As long as there is a variation (positive or negative) between the prior data and the expected estimate that aligns with the prevailing market sentiment (the longer-term bias derived from the respective central bank), this can offer trading opportunities (entry and risk are generally determined based on technical levels). As an example, let’s assume the BoE is hawkish (rates are expected to rise if growth continues to increase), and GDP (Gross Domestic Product) data is anticipated to come in higher than the previous data, you could see the GBP/JPY currency pair rally into that event and thus, provide tradeable long opportunities. At the release time, these traders tend to unwind their positions (buy the rumour, sell the fact). 

As a note on the two above-mentioned strategies, you will find that the majority of the opportunities are found in the European/London trading sessions, though there will also be times when the Asian session offers occasions to trade as well.

One other trading strategy used by professional traders is the carry trade; this is more of a longer-term strategy, however (the first two Forex trading strategies are more suited to short-term scalping and day trading). GBP/JPY is a popular carry trade pair. The carry trade involves borrowing a low-interest-rate currency (JPY) and investing it in a higher-interest-rate currency (GBP). This strategy profits from the interest rate differential but exposes traders to currency fluctuations.

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