Understanding How to Trade GBP/JPY: A Comprehensive Guide

Understanding how to trade GBP/JPY (GBPJPY) is crucial in the ever-evolving world of Forex trading due to the pair's unique blend of interplay stirred by the United Kingdom and Japanese economies.

Forex traders who lack knowledge of the numerous factors moving the GBP to Japanese Yen may increase the chances of unexpected losses because of the pair's sharp price movements.

However, the real challenge may lie in learning the intricacies of the minor currency pair, which may close the knowledge gap for those who desire to trade Forex.

This guide to understanding how to trade GBP/JPY in Forex delivers insights into the essentials of one of the world's most traded minor pairs, aiming to slightly ease a journey fraught with risk. Here's what will be covered:

• Understanding GBP/JPY: What is GBP/JPY and its role in the financial market?
• Influencing Factors: The economic events and indicators that can affect the pricing of GBP/JPY.
• Trading Importance: Why GBP/JPY is important for all traders, and what risks and opportunities it presents.
• Practical Trading of GBP/JPY: Steps to trade GBP/JPY, including calculating its pip value and using leverage.
• Risks and Rewards: The pros and cons of trading GBP/JPY to provide a balanced view of its potential.
• Risk Management: The importance of GBP/JPY risk management strategies and their impact on the pair's successful trading.

For experienced Forex traders, this Forex GBPJPY guide strives to equip you with the knowledge and tools to navigate the GBP/JPY trading market with more confidence.

What Is GBPJPY?

The GBPJPY is a minor Forex pair that refers to the exchange rate between the British Pound and the Japanese Yen, two of the world's major currencies.

GBP to JPY is a minor currency pair in Forex, also called a cross currency pair, involving the Great Britain Pound (GBP) as a base currency and Japanese Yen (JPY) as a quote currency.

The GBP/JPY Forex trading rate indicates how many Japanese Yens are needed to buy a single Pound.

GBP and JPY are among the most traded currencies in the world, making the GBP/JPY Forex currency pair one of the most liquid and popular currency pairs to trade. The British Pound is the fourth most popular currency in terms of trading volume, while Japan's currency is the third most traded currency.

The Symbol for GBP/JPY (£/¥)

The British Pound symbol, denoted as £, originated from the letter L as far back as 1660, from the initial of the Latin word 'libra', meaning a Pound of money. Conversely, the Japanese Yen (JPY) is the currency of Japan and is often represented by the Japanese Yen symbol ¥. The word “Yen” means "circle", describing the shape of coins used in the country. The Pound Sterling to Yen pair is denoted as £/¥.

GBPJPY Currency Pair Nickname

Most currency pairs are known to have Forex trading names. The GBPJPY FX cross is nicknamed "The Beast" due to its historical volatility and potential for large price swings. GBP/JPY's average range of daily volatility spans around 150 pips. The Forex pair is also known as the "Geppy" or "Dragon".

Irrespectively, the GBP is called the British Pound Sterling, owing to the silver coins called Sterling, which were minted using a Pound of silver.

GBP/JPY Characteristics

The GBP/JPY pair offers a particular glimpse into global market sentiment and economic trends. Here's a refined overview of the key characteristics that define the behaviour of this pair:

GBP/JPY as Global Sentiment Indicator

• Acts as a proxy for global economic health and market sentiment.
• Pound weakens in risk-off environments and strengthens in risk-on due to time-varying sensitivities experienced since 2007.
• Yen strengthens in risk-on environments, stemming from Japan's safe banking system and abundant foreign exchange reserves.

Safe-Haven Status of the Japanese Yen

• Despite Japan's high debt levels, the Japanese currency is considered a 'safe-haven' currency.
• Supported by Japan's large trade surpluses and domestic demand for government bonds.
• Empirical evidence recognises it as a hedge against risk unless the government artificially intervenes.
• Wuchang researchers found better attributes during financial crises and worse during real crises like an energy crisis.

Pound's Safe-Haven Comparison

• The Toronto Metropolitan 2024 paper found the weakest safe-haven characteristics among currencies for the Pound.
• The Pound can perform better against currencies with riskier profiles, such as the Australian Dollar.

GBP's Forex Market Popularity

• It is one of the most popular Forex pairs traded in the Forex market.
• It reflects the UK's large economy and London's Forex hub status.

What Is the Best Time to Trade GBPJPY to Avoid Volatility?

Due to the distinct nature of the British and Japanese economies, the pair exhibits high volatility and can develop wider ranges spanning thousands of pips. As such, in order to avoid trading during the most volatile times, the best time to trade GBP/JPY GMT is during the Asian and London trading sessions from 8 a.m. to 9 a.m. These two sessions tend to bear the most liquidity for the pair. The overlap between London and Tokyo trading hours can provide ample opportunities to trade GBP/JPY throughout the day. It is important to note, however, that trading any currency pair, or GBPJPY only, may carry a high degree of risk and is not suitable for all investors.

What Moves GBPJPY?

Various factors and market updates can move the GBPJPY, making its price forecast and analysis difficult.

The UK economy is financial service and trade-oriented, while Japan's economy depends on manufacturing and exports. On the one hand, the British Pound is tied to UK economic performance. On the other hand, the Yen's value is also affected by carry trades and potential Japan central bank intervention, in addition to safe-haven inflows and other critical economic indicators that affect how to trade the Yen.

Performance of the UK and Japanese Economies

Key economic indicators in the UK and Japan that can impact the rate of the GBP to Japanese Yen include GDP growth, inflation rates, interest rates, and unemployment.

In the UK, economic reports covering prices and the balance of payments are also critical for GBP Yen forecast. Supplementary indicators like retail sales, manufacturing, and production data can reflect how economic activity is performing and may also impact GBP. The PPI inflation report is also important to track, as high CPI or PPI inflation can devalue GBP.

On the other hand, additional important economic indicators affecting the Japanese Yen are the trade balance and the Tankan business confidence survey. Japan actually owes its economic fame to its large manufacturing and export sectors.

BOE and BOJ Monetary Policy Decisions

The Bank of England's (BOE) and Bank of Japan's (BOJ) central bank decisions on monetary policy play a significant role in the GBP/JPY valuation.

The BOE's monetary policy actions and the BOJ's low-interest rate policy, often used in carry trade investing, can lead to investment flow shifts and impact GBPJPY sentiment.

Rate hike or rate cut speculation from either governments or BOJ intervention that can affect the Yen can impact the GBP/JPY pair. In fact, Fed interest rates also offer important GBPJPY signals.

Currency Interventions

Japanese authorities have been known to intervene in the currency market to weaken or strengthen the Yen, depending on its pace of movement. Although BOJ intervention concerns limit Yen selling, a study published in 2023 by the National University of Singapore found that the BOJ interventions to devalue the Yen are more effective than revaluing it.

Risk Sentiment and Demand for Safe Havens

Market sentiment and global events can also impact the GBP/JPY pair. Due to its proxy for market sentiment, geopolitical tensions, crisis risk, and any major GBPJPY news, the pairing may be impacted. In fact, GBP/JPY has a long history and has witnessed large swings during events like the global financial crisis (GFC) and Brexit.

The direction of US Treasury yields and stock market moves that point to risk appetite also partly affect the Yen's strength or weakness.

Japan's economic stability stems from a strong banking system, low inflation, and a high savings rate, which are the main reasons for its safe-haven status. Any change in these aspects may also impact the competitiveness of Japanese exports and the Yen's stability.

External Factors

Currencies like the USD and EUR, commodities like oil (CL), bond markets like UK gilts, stock indices like the FTSE 100 (UK 100) and Nikkei 225 (Japan 225), along with news headlines from the UK or Japan, can all impact the Pound to Yen exchange rate.

For example, the Dollar/Yen (USD/JPY) exchange rate influences energy costs in Yen terms, as Japan imports most of its fossil fuels. When the Yen weakens, production costs rise, and the economy suffers.

Another example is the Nonfarm Payroll (NFP) report. If the report shows weakness, the Yen could gain against the Dollar, pushing the Pound to Yen exchange rate lower. Fed commentary also affects the currency pair due to its impact on risk trade flows. If the Fed is more hawkish, the Dollar would rise, and traders may decide to sell the Japanese Yen.

GBPJPY Correlation

From a statistical standpoint, several currency pairs have a Forex correlation with GBPJPY. EURJPY (EUR/JPY), for example, could be an alternative currency pair to trade instead, as it has the highest positive currency correlation coefficient of 97.8%. On the other hand, GBPJPY and GBPUSD correlation and GBPJPY and XAUUSD correlation are currently negative. Conversely, the USDJPY-GBPJPY correlation is 75% positive. Many traders use Forex correlations to generate trading GBPJPY ideas.

In order to produce Pound to Yen forecasts, traders need to monitor various economic indicators and data from the UK and Japan.

Why Is GBPJPY an Important Forex Pair?

Historical Significance and Volatility

The pair has a long history and has experienced large swings during events like the most recent COVID-19 pandemic. The pair's volatile history can make it suitable for trading strategies such as GBP/JPY technical analysis and fundamental analysis.

Trading Opportunities and Momentum

Traders often trade GBP/JPY because it displays strong trends and momentum, providing clearer signals for entering and exiting trades despite GBP/JPY volatility.

Risk Management

GBP/JPY's high liquidity means traders can more effectively implement risk management strategies like stop-losses and hedging, especially during peak market hours.

Appeal to Day Traders

The pair often moves over 100 pips per day, appealing to those who trade GBP/JPY. Active Forex traders are also attracted to the GBP/JPY pair because of the opportunity for profits from average trading day volatility and suitability for carry trade strategies. However, Forex GBP/JPY trading is generally risky and can lead to losses, whether trading JPY pairs or not.

GBP/JPY Forex Carry Trade

A GBP and JPY carry trade entails borrowing the lower interest-yielding Japanese Yen and investing in the higher-yielding Pound to profit from the interest rate differential. Despite its potential for profitability, this GBPJPY trading strategy comes with risks, given the significant historical interest rate gap.

Adverse exchange rate fluctuations can negate interest gains, necessitating stringent risk management to address market volatility. The carry trade strategy's success hinges on the exchange rate's stability or favourable movement.

GBP/JPY Carry Trade Strategy Example

Let's consider a hypothetical example of a carry trade with the GBP/JPY currency pair as of April 2024.

The interest rate in the UK is 5.25%, while the interest rate in Japan is 0.10%. This scenario creates an interest rate differential of 5.15%, an outcome often observed in carry trades involving the GBP/JPY currency pair, thanks to decades of Bank of Japan quantitative easing efforts. A professional trader looking to execute a carry trade may do the following:

1. Borrow Yen: A trader borrows JPY at a low interest rate from the BOJ, at 0.1%.
2. Convert to Pounds: The trader then converts the borrowed JPY into GBP. If they borrow 19,250,000 JPY and the exchange rate is 192.50 JPY for 1 GBP, they would get approximately 100,000 GBP.
3. Invest in GBP Assets: This GBP amount is then invested in a UK financial instrument, like a government bond, that yields a higher interest rate at 5.25%.
4. Collect Interest: Over one year, the trader would earn 5,250 GBP in interest on their GBP investment objectives.
5. Pay Interest on Yen Loan: At the same time, the trader would owe interest on the borrowed JPY. At a rate of 0.1%, the interest due on the loan of 19,250,000 JPY would be 19,250 JPY.
6. Calculate Profit: At the end of the year, the trader would convert the GBP interest earned back to JPY. Assuming an exchange rate of 192.50, the 5,250 GBP of interest would convert to 1,011,125 JPY. After paying the 19,250 JPY interest on the 0.1% loan, the trader's profit would stand at 991,875 JPY.
7. Repay the Loan: The trader repays the initial 19,250,000 JPY loan. If the exchange rate has not changed, the loan repayment would not affect the profit from the interest rate differential.

It's important to note that actual carry trade profitability is subject to fluctuations in currency pair, transaction costs, and interest rate adjustments.

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How to Trade GBP/JPY with CFDs?

To trade GBPJPY, experienced traders may speculate on whether the price of GBP/JPY will rise or fall by entering into a Contract for Difference (CFD) without owning the actual underlying asset. A GBP/JPY CFD is a high-risk financial contract based on the change in the price of the underlying asset.

Aside from the GBP/JPY CFD trading, traders may want to closely monitor economic indicators, economic data releases, geopolitical events and GBPJPY news before engaging in a sell or buy position. In fact, effective pair trading requires a solid understanding of GBP/JPY fundamental analysis, knowledge of appropriate GBP/JPY technical indicators, the ability to perform GBP/JPY analysis, and reading GBP/JPY chart patterns.

Before the actual act of trading GBPJPY CFDs, one must understand how to calculate the GBPJPY pip value and leverage for this currency pair.

GBPJPY Pip Value

For cross-currency pairs (without USD) like the Japanese Yen, one pip equals 0.01 instead of the typical 0.0001 in major currency pairs because the Japanese Yen uses two decimal places.

To determine the GBPJPY pip value for a trade size, one has to multiply 0.01 by the number of units traded. For example, if trading 1,000 units of GBPJPY, one pip would equal ¥1.

To calculate the pip value for GBP/JPY, one can use the formula:

Pip value = (Pip size/Exchange rate) * Position size.

GBP/JPY

Pip value = (0.01/196.85) * 1,000 = 0.05

Alternatively, traders can use an online GBP/JPY pip calculator for precision and convenience.

GBP/JPY Leverage

GBP/JPY CFDs are leveraged products, meaning traders only need to deposit a small percentage of the full value of a trade. Leverage allows trading GBPJPY without needing the full value of a position upfront. However, leverage also magnifies losses. Plus500 offers a leverage of up to 20:1 for retail traders, which means one can trade £20,000 worth of GBPJPY with only a £1,000 margin.

GBP/JPY Stop Loss and Take Profit

A stop-loss order closes a trade if the current price moves against the direction of the order by a certain amount. For GBPJPY, a 20-30 pip stop loss is common for a standard lot trade. Conversely, a take-profit order closes a trade once it reaches a profit target. Typically, traders aim for at least a 1:2 risk-reward ratio, e.g. a 30 pip stop loss and 60 pip take profit.

Steps to Buy or Sell GBP/JPY CFDs at Plus500

Traders interested in how to buy and sell the GBP to JPY pair to gain or lose from short-term fluctuations can start with Plus500’s Forex CFDs by following a few steps:

1. Open a Trading Account: Sign up on the Plus500 proprietary platform or Plus500 trading app and complete the registration process.
2. Verify Account: Verify your identity and complete verification steps per regulatory requirements.
3. Deposit Funds: Deposit the minimum required amount to begin GBP/JPY trading on Plus500.
4. Navigate to the Trading Screen: Once logged in, you'll be taken to the main trading screen, where you can view the most popular instruments available to trade.
5. Search for GBP/JPY: Use the search bar or navigate the categories to find the Plus500 GBP/JPY pair. Alternatively, scroll down the 'Most Popular' watchlist to 'Forex', 'Minor' and select 'GBP/JPY'.
6. Open the Trade Dialog: Click on the 'GBP/JPY' floating addon within the GBP/JPY live chart to open the trading window.
7. Choose GBPJPY Buy or Sell: Decide if you want to go long (buy British Pound) if you believe the value of GBP will increase relative to JPY or short (sell: equivalent an order to buy Japanese Yen) if you believe it will decrease.
8. Set Trade Size: Enter the amount of money you want to trade or the number of units you want to perform GBPJPY buy or sell trades.
9. Set Stop Loss and Take Profit: Consider setting a stop-loss order to limit potential losses and a take-profit order to secure profits at a specified price level. Plus500 also offers 'Close at Profit' (Limit) and 'Close at Loss' (Stop Loss) orders.
10. Review Trade Details: Double-check all the trade parameters to ensure they align with your Forex trading strategy.
11. Execute the Trade: Once satisfied with your setup, click the 'Place Order' button to open your position.
12. Monitor Your Trade: After executing the trade, monitor your position closely. You can check open positions under the 'Open Positions' tab on the left or edit it under the instruments list should it be unfilled.
13. Close Your Trade: To close your position, go to the 'Open Positions' tab, find the relevant trade, and click the 'Close Position' button.

Pros and Cons of Trading GBP/JPY CFDs

Due to high GBP/JPY volatility and the fundamental factors driving it, the currency trading pair offers opportunities for short-term and long-term GBPJPY trading strategies while posing risks from one currency and the other.

Pros of Trading GBP/JPY

• Diversification and Strategy Flexibility: Trading GBP/JPY can diversify a Forex portfolio, allowing traders to spread their currency exposure.
• Dynamic Trading Environment: The interplay of factors influencing the British Pound and Japanese Yen contributes to the high volatility of the GBP/JPY pair, creating a dynamic environment for Forex traders.

Cons of Trading GBP/JPY

• Forex Correlation Risks: Traders may face risks associated with the price movements of GBPJPY and its constituent pairs, such as USD/JPY. This presents risks for traders holding positions in both pairs.
• Volatility and Risk Management: While GBP/JPY volatility can offer opportunities, it also carries the risk of amplified losses from wide stop-losses, false GBPJPY signals, and strong competition from algorithmic traders.
• Market Conditions: High GBP/JPY spreads and whipsaws can be an issue during major news releases.
• Crosses Trading Risks: Trading Forex crosses involves higher volatility, spread, counterparty and risks from political events.

Final Thoughts

While exploring Forex minor pairs offers benefits, traders should research each minor currency pair, understand their nuances, and watch for correlated Forex pairs, GBPJPY news events, and liquidity levels to trade them successfully.

With a comprehensive understanding of these factors, traders can better consider market behaviour and tailor their GBPJPY trade ideas accordingly. This knowledge, combined with disciplined risk management techniques and a continuous learning mindset, may empower traders to learn how to trade GBP/JPY successfully and potentially reap the rewards of the Forex market or face FX trading losses.

GBPJPY Forex Pair FAQs

Why is GBP/JPY So Popular?

GBP/JPY is one of the most popular pairs due to its high volatility, offering numerous trading opportunities, and its significant volume from the strong economic state of Japan and the UK.

Is GBP/JPY a Major Pair?

GBP/JPY is not traditionally classified as a major pair since it doesn't include the US dollar, but it's highly traded and valued in Forex markets.

How Liquid is GBP/JPY?

GBP/JPY is considered highly liquid due to the volume of trades from the sizable economies of the UK and Japan, which combine to over 250,000 contracts daily, according to trading statistics.

Can I Trade GBP/JPY with a Small Account Size?

Yes, you can trade GBP/JPY with a small account size by using leverage carefully and managing your position sizes to ensure you do not overextend your risk.

What Role Does the USD Play in Trading GBP/JPY?

The USD can indirectly impact GBP/JPY, as both the GBP and JPY are heavily traded against the USD. Therefore, USD strength or weakness can influence GBP/JPY exchange rates.

Is GBP/JPY Hard to Trade?

Trading GBPJPY can be challenging due to its noted volatility. The pair's price can swing widely, which may make it difficult for some traders to perform a solid GBPJPY prediction today.