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- GBP/JPY is in a short-term downtrend likely to extend

- Break below 141 lows required for more downside

- BOJ meeting on Thursday unlikely to register change

GBP/JPY is trading at 142.20 at the time of writing after declining 0.3% percent since the start of the week as the Yen trades with a bullish tone amidst ongoing weaknesses in global stock markets. The liquidations of stock holdings often go into the 'safety-haven' Yen, thereby bidding up the value of the currency.

A slump in oil prices, which have fallen a staggering 7.7% since the start of the week, appears to also be supportive of the Yen considering Japan has to import most of its oil, so the weaker the price of oil the more it benefits the country's trade balance.

The technical picture is marginally bearish in the short-term, although not convincingly so. The pair is falling within a consolidation block. It has now established a bearish sequence of peaks and troughs since touching the November highs. Two lower highs and lower lows are one sign the short-term trend may be down.

The RSI momentum indicator in the lower panel has fallen in a reflection of the exchange rate but not as steeply, and this is suggests bearish momentum could be waning somewhat. It is neither particularly bearish or bullish though.

As things stand we are bearish short-term on the condition that the pair can break below the 141.18 lows. If it can, we see the pair falling to the next downside target at 140.000, which, apart from being a major round number and therefore likely to see greater profit-taking, is also the level of the historic lows made in 2017.

Historic lows are often levels of strong support and resistance, thus we see a possibility the pair could base at 140 before deciding in which direction to go next.

Longer-term the technical picture is more complex with evidence the pair could break higher. GBP/JPY has formed what could be defined as a bullish ‘wedge’ pattern since peaking in January, and this indicates a strong propensity to more upside.

GBP/JPY has already made several false breaks out of the wedge, however, bulls have so far failed. This does this mean they might not be successful in the future, however.

From a fundamental perspective, recent Japanese data has been poor: the trade balance in November revealed a deeper-than-expected decline to -737bn Yen, from -600bn expected, and -450bn previously. It was the lowest result since January.

It was mainly because of a slowdown in exports which showed only a 0.1% rise in the month, whereas imports rose 12.5%. Whilst easing oil prices will continue to help reduce the import bill, without a corresponding uplift in exports the balance will remain in deficit, and this will weigh on the Yen.

The main events in the remainder of the week are the Bank of Japan (BOJ) interest rate decision on Thursday at 3.00 GMT and the inflation rate, later in the day at 11.30.

The BOJ has not changed interest rates since 2016 and is unlikely to change them at the next meeting. Although wages rose strongly mid-year and the BOJ tweaked policy in response the pick up the wage gains appeared to be only temporary, and no further measures were taken.

Of the meeting, Singapore-based bank OUB, say, “among the G10 central banks, the Bank of Japan (BOJ) continues to be the least likely to normalise its easy monetary policy anytime soon.” But at the same time they, “cannot rule out that the "tweaks" may be brought forward to Dec 2018.”

By ‘tweaks’ they mean adjustments to yield curve control, a complex manoeuvre by which they keep longer-term yields ‘artificially high’ by purchasing less longer-term bonds. This helps banks to remain profitable since much of their profit comes from short and long-term interest rate arbitrage. The thinking goes that if banks are more profitable they will lend more generously to businesses in the real economy.

Inflation has risen fairly strongly but not outside of the usual range. It rose by 1.4% year-on-year in October, its highest level since February, yet it is still not at the 2.0% target where the BOJ might think about discontinuing quantitative easing and raising interest rates.

Core inflation, which omits volatile food and fuel components, is forecast to remain at 1.0% when it is released, at the same time on Thursday. Analysts often say it is a more accurate gauge of underlying price pressures than headline inflation.

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