How to Trade GBP/JPY Analysis

The UK and Japan economies are two of the largest in the world. This can lead to large price swings in the GBP/JPY exchange rate. In this article, you will learn how to start GBP JPY investing, the best time to trade GBP JPY, and the major factors that influence the price movement of the currency pair.

Understanding the GBP/JPY Exchange Rate

GBPJPY is the currency pair symbol for how the British pound moves against the Japanese Yen. The first currency in the pairing is known as the base currency and the second currency in the pairing is known as the term, or counter currency. The base currency is always equal to one.

If the GBP JPY exchange rate was trading at 135.75, this tells us that one British pound would buy you 135.75 Japanese Yen.

However, at most currency exchanges (like the one in airports) and in most trading platforms there are usually two exchange rates quoted for a currency pairing, as the example from the MetaTrader 4 trading platform provided by Admirals shows below:

The above image shows a bid price and ask price which will constantly fluctuate as live prices move up and down.

• If a trader believes that GBP JPY exchange rate is going to rise, they may buy (or go long) on the currency pair which they can only do at the ask price level.

• If a trader believes the GBPJPY exchange rate is going to fall, they may sell (or short) GBP JPY which they can only do at the bid price level.

--> You can read more about short-selling in the 'What is Short Selling?' article.

The difference between the bid price and the ask price is the spread which is just one cost of trading. Using the example above:

• The spread is 0.027 pips (the term used to refer to one unit of price movement). This is calculated by subtracting the ask price from the bid price (135.539 - 135.512 = 0.027).
• As the minimum contract size is 0.01 pips, the spread of GBP JPY in the example above would be referred to as 2.7 pips (0.027 / 0.01 = 2.7).

This basically means that if you bought at the ask price, then the market would have to move at least 2.7 pips higher for you to break even, as now the bid price (the price you sell at) would be the same level as the price you bought at (the ask price). Anything above 2.7 pips is profit. Of course, if the market did not go higher then you would be losing pips and therefore be in a loss.

You can also view the spread directly in the MetaTrader 4 and MetaTrader 5 trading platform, as shown below. The two red horizontal lines show the ask price and bid price levels.

Did you know that you can view live prices of GBP JPY and on more than 40+ other currency pairs directly from the MetaTrader 5 trading platform provided by Admirals? Through this platform, you can also access advanced trading tools and indicators and trade directly from the chart with one-click trading. 

How to Create a GBPJPY Trading Strategy

There are a variety of factors that influence the movement of GBPJPY. Not only will there be domestic issues in the UK or Japan that affect the strength or weakness of their currency, but also imports and exports will play a big role.

As a large portion of institutional trading orders are from programmed algorithmic trading strategies, technical analysis can also impact the price of a market such as GBPJPY. Let's have a look at fundamental analysis first and then technical analysis.

GBP JPY Trading Strategy Using Fundamental Analysis

Fundamental analysis is the study of economic data to identify the strength or weakness of an economy and subsequent capital flows in and out of a country. These data points could include international trade flows between the UK and Japan, demographic trends, interest rate changes, employment figures, central bank policy and more. Some of the key economic indicators to take into consideration include:

1. The Bank of Japan

While Japan has the third-largest economy in the world, the country has struggled with deflation since 1980, largely due to a huge real estate bubble in 1980, the stock market bubble in 1990, the Great Hanshin earthquake in 1995 and the 2001 economic bubble burst. This period was dubbed the Lost Decade. At this time the Bank of Japan started quantitative easing which was then commonly used by all central banks to deal with the 2008 financial crisis.

The Japanese economy was only just starting to get better in 2006 before the 2008 financial recession decimated its economy once again. It is during this time the bank started buying Japanese government bonds and in 2012 then Prime Minister Shinzo Abe embarked on Abenomics. A term that refers to Abe's economic policies that were designed to curb deflation by increasing the nation's money supply, boosting government spending and trying to make the Japanese economy more competitive. Subsequently, the bank has kept a path of zero interest rates for quite some time.

This is why the Japanese Yen is often used as a funding currency to purchase yield abroad. It's also a reason why Japan has been the biggest investor in the world for the past three decades. The JPY was one of the worst-performing currencies during the first quarter of 2022 as it vowed to keep bond yields at zero and keep interest rates low. This was the opposite actions of other central banks such as the US Federal Reserve and Bank of England who enacted interest rate rises leading to USDJPY and GBPJPY being top-performing currencies throughout 2023 and possibly into 2024.  

2. The Bank of England

The UK's central bank has a wide range of responsibilities and acts as the government's bank and the lender of last resort. Its focus is primarily on overseeing monetary policy for the UK and sets the official interest rate through the Monetary Policy Committee (MPC). The Committee meets eight times a year to discuss whether interest rates should change, or not, to meet the government's inflation target.

Before the financial crisis in 2008, the interest rate was set at 5%. After a very rocky period dogged by the UK's decision to leave the EU called Brexit and the coronavirus pandemic, interest rates fell to 0.1% in 2020, with some predicting the potential of negative interest rates at some point in the future. 

However, this did not materialise. Instead, due to high inflation and the energy crisis from the Russia-Ukraine conflict, by May 2022, the Bank of England increased the interest rate to 1% - the highest in 14 years. The central bank began interest rate hikes in late 2021 which helped to briefly lift the pound. 

Due to the cost of living crisis in the UK, analysts feared that rising interest rates would lead to a period of stagflation which helped GBP to be one of the worst-performing currencies in the first quarter of 2022, especially against the US dollar and the Japanese Yen. The UK government added to the woes of the British pound when they announced a new 'mini-budget' in September 2022. The announcement of increased spending for tax cuts in a time of high inflation and interest rates was not received well by the market. The collapse in the pound forced the Bank of England to intervene and prop up the UK bond market. 

However, during the second half of 2023, the British pound recovered thanks to falling inflation and is a currency to watch in 2024 and beyond. You can learn more about GBPUSD trading strategies in the 'How to Trade GBPUSD' article.

3. Economic data

What affects GBP JPY? UK and Japanese economic data announcements have the biggest effect on the currency. These can have both short-term and long-term impacts on the price direction of GBP JPY. Many traders would attempt to use technical analysis to try and capitalise on short-term volatility, while some would use technical analysis if a trend develops in the fundamental picture.

You can keep track of economic news announcements from the Admirals Forex Calendar page. Here you can also register for free newsletters listen to the Weekly Trading Podcast and read about other market-moving news in the Trader's Blog section. In the calendar, you can filter to view UK and Japanese news announcements by the level of impact.

--> Did you know you can learn more about what's happening in the market through the Admirals Trading Spotlight webinar series?

Three times a week a professional trader will talk through the markets and how to trade them. They are completely FREE to attend but you need to reserve your complimentary spot. To do so, simply click on the banner below:

GBP/JPY Trading Strategy Using Technical Analysis

Technical analysis of the currency markets is very popular. It is the practice of studying patterns in historical price movement to identify clues on whether buyers or sellers are in control of the market and where price could potentially move to next. There are three main types of technical analysis:

1. Bar/candle patterns. This is the study of individual time-based price bars/candles such as the daily, four-hour and thirty-minute price bar or candle. Each bar or candle shows the open, high, low and close information and there are many different types of patterns traders would use to identify trading opportunities. You can learn more in the 'Price Action Trading Strategies' article.

2. Chart patterns. This is the study of groups of bars and price action to identify graphical patterns that develop over a longer-term. In this type of analysis, traders would use drawing tools such as trend lines, horizontal lines, Fibonacci lines and others to identify well-known chart patterns such as symmetrical triangles, cup and handle patterns to name a few.

3. Indicators. Technical trading indicators are used to help identify a multitude of scenarios such as overbought, oversold price conditions, market trends, reversals and more. The MetaTrader trading platform provides a large range of different trading indicators that are categorised through Trend, Oscillators and Volume indicators.

Below is an example of a trading GBP JPY live price chart with a variety of technical indicators, including Envelopes, the Stochastic Oscillator and the MACD. All - and more - are available from the MetaTrader trading platform provided by Admirals.

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With this FREE upgrade, you can access even more indicators such as Pivot Points, Renko Charts, Keltner Lines and Sentiment and Correlation indicators.

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When is the Best Time to Trade GBP/JPY

Picking the best time to trade a GBPJPY trading strategy will be dependent on the trading strategy you use. Even then, not every time you trade will be the best time as there are many different influences on the price volatility of GBP/JPY. Why is GBP JPY so volatile? Simply put, because the trade between these two countries is large, just think about the auto industry where the UK imports a lot of Japanese cars and goods. This is why risk management should be the hallmark of any GBP JPY trading strategy.

However, many traders do like to trade when there is the largest amount of volatility in the market rather than the lowest amount. The Average True Range (ATR) indicator can help traders identify when volatility levels are higher than usual. This is because the indicator measures the high to low of the bar timeframe you are viewing and then finds the average of these values over a user-defined period of bars looking back.

For example, the screenshot below shows the ATR (14) indicator plotted on the GBP JPY one-hour price chart. The ATR (14) indicator shows us the average range of these one-hour bars over the past fourteen bars. The vertical lines on the chart are 'period separators' and they indicate the start of the trading day and the end. What is evident is that the ATR tends to tick upwards a little after the vertical line or beginning of the day.

Interestingly, the uptick in the ATR (14) indicator occurs just around the European session open when London-dealing desks start to open and transact in GBP JPY. As London shares the same time zone with Asia and the US, there tends to be an increase in volatility in the currency markets when this session opens.

When is the best time to trade GBP JPY? From a small test using the ATR indicator, it shows the most amount of volatility is in the European session, around 8 am London time. Now let's take a look at an example of a possible GBP/JPY trading strategy.

GBP/JPY Trading Strategy Example

When it comes to trading the financial markets there are many different types of trading strategies available. Choosing the right one for yourself does require some trial and error as every trader has different resources, attitudes and personalities.

The most important part is to keep it as simple as possible when you first start trading and then build upon it as you develop more experience as a trader.

Let's go through a simple way to start building the foundations of a trading strategy.

GBP JPY Trading Strategy using Moving Averages

To start with, let's use one of the most popular trading indicators to identify the trend, moving averages. Below is a four-hour chart of GBP JPY showing the 21 exponential moving average (21 EMA) in blue and the 50 exponential moving average (50 EMA) in red.

To add a moving average on your chart, simply click on the Insert tab from the top menu in the MetaTrader 5 trading platform, then select Indicators -> Trend -> Moving Average. In the pop-up box, you can select the period and the colour as above.

As moving averages are used to identify the trend of the market, they can be used for the first few rules, as stated below:

• GBP JPY Trading Strategy Rule 1:
  • Identify long positions only when the 21 EMA is above the 50 EMA.
• GBP JPY Trading Strategy Rule 2:
  • Identify short positions only when the 21 EMA is below the 50 EMA.

In the chart above, it's clear to see that - on average and certainly not all the time - price does conform to the above. The only exception is when the trend is changing and the price is moving through the moving averages.

Now let's have a look at some additional rules to find the potential areas where price could turn in line with the trend.

GBP/JPY Trading Strategy using Moving Averages and Stochastic Oscillator

To do this, we can use an overbought and oversold oscillator like the Stochastic Oscillator. To plot this onto the chart simply click on Insert from the top menu, then Indicators -> Oscillators -> Stochastic Oscillator. You can adjust the settings in the box or keep them as the default. For this example, we will set the %K period to 3, the %D period to 3 and the Slowing line to 3.

When one of the Stochastic lines goes above the 80 level it is deemed overbought. If one of them goes below the 20 level it is deemed oversold. Now let's further elaborate on our rules stated earlier.

• GBPJPY Trading Strategy Rule 1:
  
  • Identify long positions only when the 21 EMA is above the 50 EMA.
  • And when one of the Stochastic lines is oversold and below the 20 level.
• GBPJPY Trading Strategy Rule 2:
  • Identify short positions only when the 21 EMA is below the 50 EMA.
  • And when one of the Stochastic lines is overbought and above the 80 level.

The yellow boxes in the chart below show instances of both rules one and two.

In some, but not all cases, price did turn and continue to move in the direction of the trend. Traders would typically further elaborate on these rules and add in more indicators, price action clues and risk management rules.

Conclusion

The GBP/JPY exchange rate can exhibit some large price swings due to the high amount of international trade between the UK and Japan. A lot of the trading activity develops around the London trading session when using ATR indicators to identify the biggest price ranges. With important political announcements expected in 2024, 2025 and beyond, it is well worth keeping track of the GBPJPY exchange rate. 

Continue Reading:

• How to Trade GBP/USD
• How to Trade EUR/GBP
• How to Trade GBP/AUD
• Learn To Trade: A Step-by-Step Guide
• Best Currency Pairs to Trade

FAQs on Trading GBPJPY

About Admirals

Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today!

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or recommendation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.