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How to trade the GBP JPY pair (British Pound and Japanese Yen)

 

The GBP JPY currency pair is commonly known as the dragon due to the heightened volatility that transpires during its daily trading sessions. In fact, the exchange rate in this cross pair can fluctuate dramatically during the day, which while may be a risk factor, it also presents exciting opportunities for currency traders that can effectively manage their exposure to risk.

 

The benefits of GBP JPY

In general, currency traders, prefer volatile markets with enough price action to drive big movements and consequently larger profits. However, volatility cuts both ways and if the price movements are too rapid or too steep, they may very easily trigger stop losses and close trades prematurely.

Therefore, traders who are interested in trading the GBP JPY pair, should ensure that they don’t place their stops too close to recent support levels.

Another reason traders find the GBP/JPY currency pair so attractive, is because of the low interest rates on JPY.

 

The GBP/JPY carry trade

If you have been trading forex for a while, you probably already heard about swaps and rollover interest. In short, when you hold a position in the market overnight, you are liable to pay or receive interest depending on the interest rate differential between the two currencies you are trading. As such, traders favor buying currencies that offer high interest while exposing themselves to currencies with low interest rates.

The Bank of Japan has capped interest rates for the yen close to zero for some time now, which makes it for a perfect currency to take advantage in a carry trade.

When trading a currency pair, e.g. GBP/JPY, you are effectively borrowing Japanese yen in order to buy British pounds. Therefore, when rollover takes place at the end of the day, the trader will receive a percentage of the total position’s value as profit depending on the interest rate different between the low interest yen and the high interest pound.

This trading strategy is quite popular with traders who don’t mind holding long-term positions, because interest rates apply regardless of exchange rate movements. For example, even if the market is idle for some time and there is virtually no movement in prices, traders may still realize profit due to the interest rate differential.

Since currency trading takes advantage of leverage, the profit potential from interest rates is magnified even further. At CM Trading, 200:1 leverage ratio is available on most currency pairs, which can increase profits substantially.

However, interest isn’t always positive and negative swaps can be applied as well. Also, it’s important to note that most brokers will charge, or pay triple the swap fees on Wednesday’s in order to account for the rollover fees on Saturday and Sunday when the market is closed.

 

What affects GBP/JPY rates

Lately, the performance of the GBP is mainly dominated by Brexit developments and trade deals between the UK and other countries. The concerns about a hard Brexit have been weighing on the GBP, which is still struggling to find its footing.

Traders who keep track of the fundamentals of the British economy including GDP numbers, monetary policy updates by the Bank of England and inflation metrics, can better predict movements in pairs involving the pound.

In terms of gauging the strength of the JPY, it’s recommended that traders follow any announcements by the Bank of Japan and any other sociopolitical developments. Social and political unrest as well as unexpected natural disasters can have a pronounced affect on the yen and its exchange rate against the pound.  

 

Conclusion

Trading the GBP/JPY pair can be both risky and rewarding in equal parts. The big daily price movements offer incredible yields for currency traders who manage to accurately predict the market’s direction, but without strict risk management rules, there is a high degree of risk to running out of equity to sustain a position.

Also, if the stop loss targets aren’t set a bit wider than normal, the rapid price movements can trigger them prematurely, resulting in closing the trade with losses – even if the market eventually moved in the direction you initially predicted.

The low interest rates offered by the Bank of Japan make the yen one of the most favorable currencies for traders who prefer to focus on long-term strategies and carry trades.

 

You can take advantage of all the benefits provided by trading the GBP/JPY pair through CM Trading’s award-winning platform.

Register here to get started now!

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