The interest rate differential is still wide enough to drive a truck through in this pair, and that’s the main focus longer-term. At this point, I look at pullbacks as an opportunity.
The British pound initially rallied against the Japanese yen during trading on Tuesday but has given back quite a bit of the gains. This does make a certain amount of sense because it has been more or less a risk-off type of environment. That to me doesn't really matter, though, because I think that's a temporary situation. The interest rate differential is still wide enough to drive a truck through, so I still prefer to own the British pound over the Japanese yen.
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Furthermore, the bond market in Japan is all over the place, and I think that is a story that will continue to play out. While the interest rates in Japan have been climbing, it's not for the right reasons, and therefore, I think the Japanese yen will continue to suffer.
Pullbacks and Support Levels
Pullbacks at this point in time will more likely than not look at the ¥210 level as a floor. After that, we have the 50-day EMA sitting just below the ¥209 level. To the upside, the ¥215 level could be your target, but we haven't made it there yet. It looks like the area right around ¥214 continues to cause a little bit of a headache.
I think it makes a lot of sense to go sideways for a while and perhaps have more of a buy-on-the-dip type of behavior in this market. The Bank of England has a little bit of a negative, kind of dovish tone to it, but it's not aggressively so, and therefore, the carry trade will be very much alive in this pair going forward for the foreseeable future.
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