Every day thousands of individuals from all over the world fire up their computers to start day trading the GBP/JPY, otherwise known as the ‘Beast’, ‘Dragon’, or ‘Geppy’. This page will look at the history of the GBP/JPY currency pair, as well as its benefits and risks, including its notable volatility and liquidity. You will then get a break down of strategy, charts, technical analysis, trading hours, plus top tips for 2018.
GBP/JPY Trading Brokers
Breaking Down ‘GBP/JPY’
Firstly, what does GBP/JPY mean? Quite simply, it is the relative value of the British pound against the value of the Japanese yen. Both are traded enough to qualify them amongst the top eight global currencies. Today the yen accounts for around 20% of trading volume, whilst the pound represents approximately 13% of forex volume.
The pair is considered a ‘cross’. This means the US dollar is not used when calculating the exchange rate.
Before investing in the GBP/JPY, it first helps to understand some fundamentals about the pair’s history. This will put you in a better position to make future price forecasts.
Why Day Trade GBP/JPY?
With so many currency pairs and trading vehicles available, including ETFs, futures, and options, why does the GBP/JPY warrant your attention?
- Volatility – Put simply, volatility ensures plenty of opportunity for generating profit. Few currencies offer the volatility the GBP/JPY does. This is in part due to its high pip value. In just 5 years in the late 2000s, there was up to a 15,000 pip change.
- Nature of the pair – Whilst the pound was once stable, high-interest rates have led to the pound being used in carry trades. The JPY has been the funding currency of carry trades for a considerable while. This created a crowded market, but when the financial crisis hit, this was turned on its head. All of this leads to greater volatility and an abundance of forex trading opportunities.
- Risk tracking – When world economies look good, stocks and commodities rise whilst bonds fall. When things go the other way, the situation reverses. This means those with an appetite and aversion to risk can utilise macro-economic sentiment to profit from market dynamics. GBP/JPY is one of the currency pairs that tracks this best, rising and falling with stocks and commodities.
- Availability of resources – In some respects, realtime trading today is easier than before. You now have direct access to graphs, candlestick charts, and amazing indicators. For example, conducting Elliott wave analysis is more straightforward. In addition, you have knowledge rich trading communities in the form of forums and trading analysis blogs.
Despite the numerous benefits, there also exists several downsides and risks to keep in mind. The most significant of which are as follows:
- Volatility – You may well have noticed this was on the list of advantages, but it also deserves a spot here too. As one of the most volatile currency pairs, false signals are a frequent occurrence. Traders can lose money and learn painful lessons rapidly. It isn’t nicknamed the ‘widow maker’ for no reason.
- Amplified losses – With the GBP/JPY, daily trends can be strong, as with the daily range. However, because of that, you often need to set wider stop-losses. This can lead to large losses.
- Experience required – Although beginners are attracted by the promise of pips, many traders suggest novice traders stay clear. Volatile moves in a consolidation phase are just one straightforward way you can be taken out. So, for those with limited capital and an untested risk management strategy, you may be better off turning your attention to another pair first.
- Automated competition – Today you must compete against sophisticated trading algorithms. As a result, how to trade successfully is no longer clear. You need more than historical charts, average daily ranges, and forecast analysis. The best indicator for the GBP/JPY pair may no longer be enough. So unfortunately, asserting an edge is becoming increasingly challenging.
Influences on Movement
Before you worry about current GBP/JPY price and news analysis, you should get a feel for what underlying forces drive movement in the currency pair.
With the GBP/JPY, the relationship between the Japanese yen and energy pricing can have a significant impact. Japan relies heavily on the importation of crude oil and natural gas to satisfy domestic energy requirements. In 2014, Japan was the 4th biggest importer of crude oil and second for natural gas.
So, there is a strong link between the price of the Japanese yen and the price of energy commodities. Historical data shows that when global energy prices shift, the yen usually moves in line with them. This has the knock-on effect of influencing the GBP/JPY.
On top of that, there are several other factors that can influence the relationship of the currency pair:
- Bank of England (BoE) – This central bank and lender of last resort oversees monetary policy and interest rates. In 2017, Haresg Menghani stated, “BoE Governor Mark Carney has already clarified that, if necessary, he would be willing to tolerate an overshoot in inflation, for some period, in order to support the economy. Hence, any signs of economic slowdown might force BoE to announce another interest rate-cut and/or an extension of its QE program.”
- Bank of Japan (BoJ) – The BoJ has been applying extremely low-interest rates for years. This will impact the strength of the Japanese yen vs the British pound. Day traders should monitor the Consumer Price Index (CPI), a key indicator of JPY-related currency crosses.
- Governments – Major political elections and decisions will impact the strength of respective currencies, such as the 2016 Brexit referendum.
- Currencies – The US dollar and euro, in particular, will all have an impact on the GBP/JPY pairing. This is because currency pairs do not move independently of each other. This is because correlation, which is detailed further below.
- Bonds – Gilt (debt securities issued by the BoE) and GJGB10 (Japan Generic Govt 10Y Yield) will also influence the relationship of the highly volatile pair.
- Indices – Another influence comes in the form of respective indexes. The success of the UK’s FTSE 100 and Japan’s Nikkei 225 stock market index can also lead to the currencies strengthening and weakening.
On top of that, wars and natural disasters can be felt in the GBP/JPY relationship. So, the savvy day trader won’t just focus on charts from Yahoo and historical data, they will keep abreast of a number of global factors, using a range of sources.
Even GBP/JPY expert advisors may not take into account currency correlation without your help. Foreign exchange currencies don’t move independently of each other. Because they are traded in pairs, their movements are tied to the movements of other pairs.
For example, if you are trading the GBP/JPY, in effect you are trading a derivative of the GBP/USD and USD/JPY pairs. This means that to a certain degree, GBP/JPY has to be related to either or both of the other currency pairs.
The problem is, pairs can move with each other, but also in the opposite direction. Plus, their correlation can change.
But firstly, there are two terms to get your head around:
- Positive correlation – This occurs when pairs react in line with each other. GBP/USD, AUD/USD, and EUR/USD, the three most commonly traded pairs, are all positively correlated. This is because USD is the counter currency and any change in this will impact all pairs.
- Negative correlation – This takes place when currency pairs move in the opposite direction. USD/CHF, USD/JPY, and USD/CAD are all good examples of this. This happens because the US dollar is the base currency.
Correlation is actually a statistical measure, ranging from -1 to +1. The former when currency pairs move in opposite directions and the later when they move together.
The best way to understand how this knowledge can assist you day trading on the GBP/JPY is to be the correlation calculator yourself. Fortunately, it is relatively straightforward. All you need is an Excel spreadsheet.
Once you have your spreadsheet up and ready, follow these simple steps:
- Input price data from your currency pairs, GBP/JPY, for example.
- Create two columns, one for each pair.
- Fill the columns with the past daily prices over the time period you are interested in.
- Type =CORREL in an empty box at the bottom.
- Highlight all the data in a column and you will get a range of cells in the formula box. Type in a comma.
- Now repeat steps 3 to 5 for the other currency.
- Close the formula. It will then look like =CORREL (A1: A25, B1: B25).
The final figure is the correlation between the two currency pairs.
Being armed with this data improves your daily outlook on forex and may allow for more accurate forecasting and help you assert that all important market edge.
GBP/JPY Day Trading Strategy
Whether you opt for a breakout or scalping strategy, timing is essential. So, when is the best time to trade GBP/JPY?
You want to focus your trading around key economic releases, which are at 01:30, 02:00, 08:30, and 10:00 EST. You should also consider focussing your efforts around the Asian European Overlap, which runs from 00:00 to 03:00 EST. This allows for some overlap with London. This is the time period where you will see the most liquidity for the Japanese yen, plus the European yen crosses.
The volatility of the GBP/JPY means the pair can trade wide swings in either direction, making trading breakouts an appealing technique. The benefit is, you can capitalise on profits when big swings are correct, and minimise losses when large swings move against you.
A top tip is to monitor your support and/or resistance lines and levels regularly. As the volatility of the GBP/JPY can cause serious fluctuations in a short space of time.
20 Pips GBP/JPY Scalping Strategy
This method is straightforward. You will use 5-minute time frames and free GBP/JPY signals. You will also use 25 exponential moving averages (EMAs) on the indicator front.
When the price is above 25 EMA, you are seeing an uptrend. When the price is below 25 EMA, it is considered a downtrend. The angle of the trend is important. A relatively horizontal angle means the market is ranging. If the angle is around 30 degrees or higher, there is a solid trend on. So, do not trend if the EMA angle is flat.
- Moving average angle is 30 degrees or more.
- The price has to be moving above the 25 EMA line.
- Your buy signal is a bullish pin bar. So, buy at market price once the bullish pin bar closes.
- Place your stop loss at least 10 pips under low of the pin bar.
- Your profit target will be 20 pips.
- Look for a moving average angle of 30 degrees or above.
- Price should be moving below the 25 EMA line.
- This time it is a bearish pin bar that is your sell signal. You should sell at market price once the bearish pin bar closes.
- Again, opt for a stop loss of 10 pips above the high of the pin bar.
- Profit target is also 20 pips.
Because the range of the GBP/JPY can be anywhere from 150-200 pips a day, there is ample scalping opportunity. However, be warned, this system may underperform in ranging, non-trending markets.
Whatever your strategy, the GBP/JPY can turn bullish or bearish quickly. You must set stop losses wide, with small lot sizes. You may even want to consider cutting your trade size to around a third of your normal trade size. This allows you to aim for higher targets, whilst also reducing potential losses in a volatile currency pair.
Summing Up Strategy
The best GBP/JPY strategy for one person, may not generate consistent profits for another trader. The trick is finding a strategy that compliments your trading style. Some people prefer focussing on bar charts and daily pivot points, whilst others will focus on economic calendars and responding to news events.
For more guidance, see our strategy page.
So, how did the two currencies develop into the GBP/JPY pair we know today? The British pound is thought to be the oldest currency in the world still in use. A turning point for the currency came in 1940 though, with the Bretton Woods agreement. Here the pound was pegged to the US dollar rate at £1 = $4.03. The Bretton Wood system was used to govern post-war exchanges for the next thirty years.
The Japanese yen, which literally means ‘circle’ or ’round object’, is much younger than its British pound counterpart. It was introduced by the Meiji government in 1871 to replace the unstable Edo period, where no standard currency exchange existed.
The Japanese aim was to join the Gold Standard of currency and the 1871 Currency Act helped them there. The stable monetary exchange transitioned into a floating currency exchange and the yen a floating currency. However, the yen lost its value during World War II. From 1949 to 1971 the yen was equivalent to 1 US dollar.
An early understanding of how the GBP/JPY currencies developed gives you the foundations to understand the more turbulent recent events.
Global Credit Crunch
A key period in the currency pair’s relationship was the global financial crisis of 2008. Between 2007 and 2009, the pound was clearly under pressure. In response to this, the pound weakened against the Japanese yen.
In fact, the GBP/JPY traded from a high of 250.13 to a low of 121.21. This was a staggering decline of over 50%. The EUR/USD dropped by 3300 pips during this period, but the shift in the GBP/JPY was far greater. At one point, there was a loss of over 7000 pips.
The Brexit decision of 2016 also had far-reaching implications. Although the repercussions were felt for less time than the crunch of 2008, volatility was still substantial. In June 2016, the GBP/JPY traded from a high of 160.66 to a low of 133.31.
However, the all-time records for this currency pair weren’t at either of these periods. Instead, they were:
- All-time high – This was 1014.000 on the 1st of January, 1963.
- All time low – A low of 116.853 was recorded on the 19th September 2011.
So, why are historical exchange rates and prices significant? These events and their implications demonstrate firstly, quite how volatile the GBP/JPY can be. But secondly, an understanding of how global events can impact the currency pairing will enable more accurate forecasting.
Investing without this fundamental knowledge may cost you profit further down the line.
Role of Great British Pound
Before you start focussing on your GBP/JPY trading signals and system, it helps to have some context about the role these two currencies play. With that knowledge, you will be in a stronger position to make predictions about the market.
Although the UK is relatively small in size, its economy is one of the largest in the world. It plays a leading role in international financial markets. In fact, London is thought of as the forex trading capital of the world.
Wind back the clock and the UK was at one time the global superpower, with the largest economy on the planet for over one hundred years. At this time the British pound was considered the world’s unofficial reserve currency.
However, the world wars sparked a decline in UK economy. On top of the effects of the war, stringent government regulations and restricted labour markets further impacted the economy.
Having said that, to some extent the UK economy has now stabilised. This can be attributed in part to its role as a key global player in financial services. Plus, to its position as the second largest producer of oil and gas in Europe, following Norway.
Why does this matter to those simply wishing to start trading the Dragon? Because the role the British pound brings a multitude of rich trade opportunities, characterised by high volatility and substantial volume.
Role of Japanese Yen
Just like the British pound, the Japanese yen has an important part to play in the forex world. Not to mention, their economy has some unusual characteristics that yen day traders must understand.
Japan is one of the biggest economies in the world, boasting one of the highest GDPs, plus it is a huge exporter. However, even with its size, it has had a challenging few decades, especially since the collapse of its real estate bubble.
Between 2001 and 2011, growth scarcely exceeded 2%. Low fertility rates and an ageing workforce have also made taxation and consumption a constant battle.
The Bank of Japan (BoJ) play a vital role in tackling these concerns. It has a mandate to combat the consistent deflation that has threatened Japan for a number of years. To do that, they have introduced low-interest rates with the hope of encouraging economic growth.
Despite their troubles, their workforce is well-educated, and whilst industries such as shipbuilding have moved to the likes of China and South Korea, Japan remains a leading manufacturer of electronics and technological components. Ultimately though, Japan is now heavily reliant on China as a trade partner.
Switched on GBP/JPY day traders should look for the driving forces behind the currencies they’re interested in. Discussions around those forces for the yen often centre around interest rates and price action. However, there are other economic data releases that aspiring traders should keep an eye out for:
- GDP data
- Retail sales
- Inflation data
- Trade balances
- Industrial production
- Employment rates
- Central bank policies
Google Finance, Yahoo Finance, Bloomberg, and Reuters are all good GBP/JPY news resources. For truly yen specific information though, the Tankan survey is particularly useful. This is published quarterly by the BoJ.
The GBP/JPY is thought of as a gauge for global economic health, as it reflects issues affecting both Western Europe’s monetary policies and those in the Asia-Pacific region. However, it is the phenomenal volatility and wide trading ranges that attracts vast numbers of day traders.
Succeeding when you open up your live forex chart will be no straightforward challenge. You will need an understanding of how and what influences each currency and economy. You will also need to use fundamental analysis, charts, patterns, and the news to spot potential opportunities. Only then can you begin your journey to join the likes of famous forex traders, Ed Seykota and Richard Dennis.
For more guidance, see our forex page.