GBP/JPY slumps from above 160 to low 158s, dragged lower as UK/US yields tumble post poor-UK/US PMI data

• A sharp drop in UK (and global) yields following weak UK and US PMI data has weighed heavily on GBP/JPY.
• The pair was last trading in the low 158.00s and eyeing a breakout to fresh monthly lows around 156.00.

UK government bond yields had already been on the back foot in the lead up to the start of the US trading session in wake of much weaker than expected UK PMI data for May released earlier in the day which triggered renewed fears about the UK’s increasingly fragile, inflation plagued economy, but that move lower accelerated in tandem with a drop in global yields after disappointing US Service PMI numbers, which triggered fears about a slowdown in the world’s most important/largest economy.

UK 10-year yields were last trading lower by more than 10 bps on the day, with similar drops seen in the US and, to a lesser extent owing to hawkish ECB commentary, the Eurozone. As a result, UK (and global)/Japan yields differentials have narrowed significantly on the day, weighing heavily on G10/JPY pairs owing to the yen’s sensitivity to rate differentials.

GBP/JPY was last trading close to one-week lows under the 158.50 mark, down about 1.6% or over 250 pips on the day and eyeing a break lower towards monthly lows in the 156.00 area. Technicians will note how the 21-Day Moving Average (at 160.40) has once again proven a solid level of resistance, as has been the case since late April. As global growth fears largely subsume fears about central bank tightening, thus sending yields lower, G10/JPY pairs like GBP/JPY remain at risk of further losses. Traders will likely be targetting a test of the 200DMA in the mid-155.00s in the coming weeks.