Among the lesser known currency pairs that can be advantageous to trade on the Forex the GBP/JPY is still rarely used by traders. And yet this currency pair can offer certain advantages for traders. Here you can learn more on this subject as we examine how this currency pair works and the indicators you should know.
The GBP/JPY is the sterling pound/yen currency pair which expresses the exchange rate between the British sterling pound and the Japanese Yen. This rate therefore represents the value of a single pound sterling in Yen.
This currency pair is quoted to 2 or even 3 decimal places with some brokers. It has what is called a ‘floating’ rate as it reacts to the difference between supply and demand.
Of course and like most currency pairs, the GBP/JPY is heavily influenced by the central banks of the two countries concerned, which regularly intervene in Forex.
For the Pound Sterling, it is of course the Bank of England or BoE that is in charge of regulation, while for the Yen, it is the BoJ or Bank of Japan that is responsible.
It should be noted here that the Bank of Japan, like many other similar bodies, tends to intervene very frequently on the foreign exchange market in order to control the rise of its currency and thus protect the country from a lower export competitiveness.
However, this parity is not one of the largest trading volumes in the Forex market, since it represents only 1% of the overall transactions in the foreign exchange market.
However, what attracts sophisticated investors to this currency pair is the high volatility it offers. In fact, over the past few years, we've seen volatility close to 300 pips, which is remarkable for a currency pair. It is for this reason that many investors use the GBP/JPY for short term speculation. This makes this currency pair ideal for Day Traders.
The range of movement seen in the GBP/JPY can be explained by the announcement effects which are most often numerous and daily as news about the GBP appears in the morning and part of the day while news about the Japanese front is more likely to occur during the night due to the time difference. So there is always an opportunity to seize.
Although the Carry Trade has long been the trading method preferred by investors for the GBP/JPY currency pair due to the difference in the interest rates that enable high profits this is no longer really the case nowadays.
Although the Japanese government maintains an interest rate close to zero on its currency, the rates practised by the Bank of England have considerably decreased over the last few years which makes this trading method less advantageous.
As the difference between the value of the British pound and that of the Japanese Yen strongly lessens, the Yen gains in value which in turn leads to the Bank of Japan intervening regularly to balance the rate. Therefore the Carry Trade is definitely not the method to favour here.
Another trading strategy that can be used to speculate on the rate of the GBP/JPY currency pair is called the Intraday strategy. In fact, by examining the historical share price charts we note that it is not uncommon to register variations of 10 to 20 pips in a single trading session on this currency pair. It is therefore necessary here to take position on the right trend.
However you can also note when you sign in to your broker’s trading platform that this currency pair generally incurs a higher spread of 4 or 5 pips. It is therefore necessary to carefully and precisely evaluate if the trend will go beyond this level to be sure you can generate the profits required. This pair’s spread can in fact be a major obstacle to the profitability of this strategy and this is why using this method of day trading for this currency pair is best approached only by highly experienced traders. This particularity can also be an obstacle for long term positions. This is why Intraday positions can be advantageous in this situation.
We know that the GBP/JPY currency pair generally makes sudden strong movements. The Intraday strategy can enable you to benefit from the latter if you are able to catch the trend at the right time but it is also crucial to take your profits at exactly the right moment to avoid a reversal of the trend which can be just as sudden.
Swing Trading strategies are also possible on the GBP/JPY currency cross for larger traders. However this method, although it offers high potential, also requires a major investment and therefore great prudence.
If you plan to implement this type of trading strategy then we recommend you use 4 hour charts which are best suited to this type of Forex trading.
On the other hand and in accordance with the highly volatile particularity of this currency pair you should continuously adapt your position in order to limit your risks. In this way you will avoid losing all your capital through a single strong movement or due to using an over high leverage level.
Although the GBP/JPY currency pair is undoubtedly highly attractive as it can enable significant profits in a short time period it remains a currency pair destined for more experienced traders as it requires a certain level of investment and careful attention as the risk of losses is also very high.
Before you jump into speculating on the price of the GBP/JPY currency pair from your favorite trading platform, let's take the time to recall here what are the specificities of this cross and its main characteristics.
By observing the trade volumes on the foreign exchange market we can in fact observe that this currency pair is not one of the most popular with traders. The larger trades are made on the less difficult pairs for trading such as the EUR/USD.
Trading in the British Pound tempts many investors but few interest themselves in its pairing with the Japanese Yen. And yet, the GBP/JPY currency pair, also called the ‘Beast’ by seasoned traders is favoured by a small group of passionate and experienced investors who recognise the potential profits it offers.
It is not by chance that the GBP/JPY currency pair is called ‘the Beast’ or the ‘Dragon’ by British traders. By examining the historical stock market charts for this currency pair we note that it is in fact a highly volatile pair that displays strong rapid and nervous movements over the short term despite the fact that its overall trend is not particularly profitable.
As you have probably understood, the GBP/JPY currency pair is not for routine traders that prefer more stable currency pairs but rather those that enjoy a risk and can master their emotions at stressful moments. It is in fact not unusual for this currency pair to rise or fall by 200 or even 250 pips in a single session which is truly an unusual difference on the Forex market.
It should also be remembered here that the rate of the GBP/JPY currency pair is actually obtained by a pairing of the two exchange rates. The rate is in fact established using two other major currency pairs, the USD/JPY and the GBP/USD and the resulting currency pair has the advantage of demonstrating a high liquidity. This is the reason why the majority of brokers apply a fairly high spread of around 4 to 6 pips on average to the GBP/JPY.
The GBP/JPY currency pair is also considered as an ideal currency pair for small and medium investors. In fact, investment funds and banks generally prefer to invest in major currency pairs due to the elevated spreads. Only smaller investors using online brokers can implement the strategies that we have explained above to enable them to profit from this pair.
To conclude, the GBP/JPY currency pair that can be interesting for those who know how to. Therefore, if you lack experience on the Forex market we recommend you begin with a less volatile currency pair. However if you are experienced then it could be highly beneficial for you to invest in this pair.