Trading GBP/JPY

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Tobias Robinson

Tobias is a UK director and partner at Investing.co.uk. He provides commentary on the financial markets in the UK and supports the testing team with first-hand observations from over two decades of active trading.

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William Berg

William is an experienced investment writer with a history in forex trading software localization and IPO consultancy. He contributes as an author and fact-checker for established financial websites.

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The GBP/JPY or ‘Geppy’, as it is sometimes pronounced, is a forex currency pair consisting of the Great British Pound and the Japanese Yen. Other common slang names include the ‘dragon’ and the ‘beast’, so-called for its infamous volatility. Trading this pair can have serious upside for experienced investors, but historical data shows that dramatic shifts in the exchange rate are common. In this article, we’ll discuss exactly what it means to trade GBP/JPY, including strategy tips. We’ll also dive into the history of the pair, its fundamentals, characteristics and what impacts its price.

GBP/JPY Explained

GBP/JPY is forex trading terminology for the value of the Great British Pound against the Japanese Yen. It is displayed as a single number. For example, if the GBP/JPY is 144, this means 1 Pound would buy 114 Yen.

The GBP is the fourth most traded currency in the world, behind the JPY in third place. Therefore, this cross pair is one of the most liquid in the forex trading world. However, it is also one of the most volatile. The Geppy trading graph is known to move dramatically, turning huge upside into loss in a short time span. The average daily range between 2014-2020 was 146 pips, compared to just 96 for the EUR/JPY.

GBP/JPY History

Any experienced forex trader knows that exchange rates are heavily influenced by world news. Keeping a keen eye on Bloomberg, Google and Yahoo Finance for political and economic changes is common. This is known as fundamental analysis. Beyond the price chart, an understanding of the history of the GBP/JPY will aid future price analysis.

The Lost Decade

The period between 1991 and 2001 is sometimes known as the Lost Decade in Japan’s economic history. The Japanese economy was stagnant in this era, with GDP growing around 1%. Other developed economies grew much more at this time. The Bank of Japan began quantitive easing in order to prevent deflation. Discussion continued into whether the Lost Decade would extend into 2021 as numerous disasters, including the 2011 Tōhoku earthquake and tsunami, plus the Covid-19 pandemic, continued to batter the JPY.

2008 Financial Crisis

In the 2008 Global Financial Crisis, the GBP/JPY showed excessive volatility beyond that seen by other currency pairs. While the EUR/USD value moved around 3,300 pips, the Dragon lost a staggering 7,000 pips at one point. The outlook was bleak for those who stopped out. But for those with the right strategy, there were profits too.

The Brexit Era

Global trade of GBP has been rocked by the vote to leave the EU. Uncertainty surrounding the British economy has reduced the desire to trade Sterling. Whilst volatility around the result in June 2016 bought profits for some, for others, Brexit meant a move away from the EU market, and therefore, less security.

To continue with up-to-date fundamental analysis on the GBY/JPY, keep an eye on economic calendars along with trading blogs and forum commentary.

GBP/JPY Trading Strategy

The best trading strategies take into account more than just news. Technical analysis involves looking at historical prices to predict the profitability of a buy or sell position in the future. UK traders use charts, indicators and signals to help identify trends. Each of the following trading strategies will involve identifying patterns in the data when trading GBP vs JPY.

Breakout Strategy

GBP/JPY is known for its extreme volatility, so many traders use the breakout trading strategy to profit from this. A breakout strategy involves monitoring market data for a break in the price level. Once a breakout is made, the expectation is the price will continue to trend in that direction. Traders who correctly forecast a trend early using the breakout method will make a profit. But, it’s important to utilise a stop loss as investing incorrectly could bring unwanted downside.

Day Trading

Day trading the GBP/JPY means never holding a position overnight. Margin and roll-over fees are charged by brokers when you hold a position outside of trading hours. Day traders typically avoid these fees by closing trades within a short time span – sometimes minutes. The best time to trade GBP/JPY is between 8am and 9am GMT when both markets are open. This is when the pair is most liquid which means tighter spreads and better prices.

Elliott Wave Theory

Technical forecast analysis based on Elliott Wave theory is popular among forex traders. Ralph Elliot developed the theory in the 1930s after an amazing prediction of a stock market bottom. Elliott describes how patterns in the data form ‘waves’ which indicate which way a market, such as the GBP/JPY, is likely to move next. Indicators and trading signals based on the Elliott Wave Theory are available for download onto your MetaTrader platform when trading the GBP/JPY.

Scalping

Scalping the GBP/JPY is a high-risk game because of the Geppy’s stark price movements. However, the strategy is also popular because of the potential reward. Scalping involves making short sharp trades that are held for a limited time period, sometimes just a few seconds, to accumulate profits. Numerous small profits add up to impressive sums if they are frequent enough. Successful scalping traders will be extremely disciplined to ensure that most trades are profitable since frequent losses can add up. Close monitoring of realtime live forex charts is vital.

Price Action

Another technical analysis strategy for trading the GBP/JPY is price action. This system involves looking at the pairs price movements on candlestick charts and setting personal thresholds which trigger actions. Traders using price action look for support and resistance lines. For example, if the current price reaches the target of 165, the trader believes it has entered a bullish phase and will continue to rise. Therefore, they will make the personal decision to go long. However, another trader might believe that a fall in value will follow. In this case, the prediction is a bearish phase and they will go short. Identifying daily pivot points helps traders build a price action strategy. Theories should be tested before executing on live trades.

Other popular strategies including utilising a difference in interest rates to perform a carry trade. The Yen tends to be a low yield currency while Sterling is high yield, making it suitable for holding positions overnight. Those with less time for analysis can utilise an Expert Advisor, i.e an automated trading robot to execute trades.

Correlations

Traders looking to understand how to trade GBP/JPY successfully need to understand correlations. Since currencies are traded in pairs and some economies are closely tied, currency pairs can move in the same direction over long periods of time. For example, in the pre-Brexit era, Sterling and the Euro might have been closely correlated as the two economies were closely tied.

The Yen tends to be negatively correlated with gold prices. Gold is seen as a safe investment in times of economic turmoil. Conversely, Yen is seen as a currency safe haven. Traders moving out of gold can sometimes move into Yen.

Correlations can change over time. Therefore it’s important to test your GBP/JPY correlation assumptions by looking at historical data. Using a forex correlation calculator can help with this.

Final Word On GBP/JPY

The key to trading the GBP/JPY is to understand the nature of the beast. Its volatility and liquidity makes it a popular pair to trade spot forex, ETFs, futures and options with. But its inherent risks should also be recognised. Keep a close eye on the Yen exchange rate forecast and daily outlook for trends that might lead to upside.

Find out more about forex trading.

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