MS G10 – Sell GBP/JPY: FXWW

From the FXWW Chatroom: With USDJPY nearing our short-term target of 110, we see good opportunity to re-establish selective strategic JPY longs such as against GBP. With notable downside surprises in recent UK growth and inflation data, the risk of the BoE staying on hold next week has increased, weighing on GBP which is highly correlated with UK real yields. Even if the BoE delivers a dovish rate hike, the subsequent flattening of the GBP curve will keep GBP upside limited. Domestic uncertainty has also risen, with the Home Secretary’s resignation, local elections and the EU and UK tackling the Northern Ireland border issue in Brexit talks this week. CFTC data also shows that GBP longs are still near the largest since 2014, suggesting further downside for the currency as positioning adjusts. Should US core PCE or wages surprise to the upside (contrary to our economists’ expectations), risk appetite may come under pressure, which would support this trade as well. The risk to this trade is if the BoE delivers a hawkish hike next week, which would strengthen GBP.

We like to sell GBP/JPY at market with a target of 144.20 and stop of 152.90.
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