GBP/JPY Outlook: Bears Eying Flag Breakout as Risk Flows Increase

• During the first half of the European session, the GBP/JPY pair showed good price action in both directions.
• Sterling gained support from a better-than-expected UK GDP report, extending support for the cross.
• A fading hope for diplomacy in Ukraine benefited the safe-haven yen while creating headwinds.

The GBP/JPY outlook is bearish as the risk sentiment deteriorates amid the Russian saga. Meanwhile, the sterling pared yesterday’s gains across the board.

During the first half of the European session, the GBP/JPY cross oscillated between modest gains and marginal losses and last traded in bearish territory below 160.00.

On Thursday, the cross faced some resistance and prompted some selling near the 159.45 area, but there was no bullish sentiment for the upside. According to revised UK GDP data, the economy grew by 1.3% in the fourth quarter of 2021, up from the 1% previously estimated. The GBP/JPY appreciated slightly due to this and the emergence of selling around the Japanese Yen.

In addition to reports that Japanese officials are uneasy and reacting to the recent weakening of the Japanese yen, hopes of diplomacy in Ukraine have faded, creating headwinds for the GBP/JPY pair. The Kremlin spokesman claimed that no breakthrough had yet been made in the negotiations. An adviser to Ukraine’s president also noted that Russia is encircling troops and attacking the eastern part of the country from Kyiv.

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Meanwhile, investors’ appetite for perceived riskier assets has been curbed by the possibility of new Western sanctions against Russia. As a result, equity markets were characterized by a cautious mood, which benefits traditional safe-haven assets, including the yen. In addition, the fact that the Bank of England has lowered its tone regarding more rate hikes should further discourage the bulls from betting on the GBP/JPY cross.

The pair has, for now, halted its recent sharp pullback from the 164.65 area, its highest since May 2016, reached earlier this week, and remains vulnerable to developments in the Russian-Ukrainian saga. Incoming geopolitical headlines will shape market risk sentiment and demand for JPY safe-haven. This will contribute to some upward movement for the GBP/JPY cross.

GBP/JPY price technical outlook: Bears to pounce flag pattern

The GBP/JPY price has dropped below the 20-period and 50-period SMAs on the 4-hour chart. The cross has formed a bearish flag pattern on the chart, indicating the continuation of the downtrend. The next stop for the bears is at 100-period SMA around 157.00 area, followed by 200-period SMA around 156.00.

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Alternatively, the pair may take an upside towards the upper band of the flag pattern around the 161.00 area. The pattern will be invalid if the upper band is broken.