How to trade the GBP/JPY forex pair

Getting started with GBP/JPY forex trading

If you’re wondering how to get started with buying and selling GBP/JPY with an online forex broker, you’ll be pleased to know that open 24 hours a day, five days a week (with a weekend close).. Unlike the stock markets, the exchange of foreign currencies does not let up at the end of business hours.

That doesn’t mean there aren’t busier times than others. Trading volumes often increase during the London session and major overlaps, but patterns vary. . There are other moments when trading volumes spike, too. Most notably when there are significant announcements involving the British or Japanese economies.

If you’re just starting in forex trading and thinking of trading ‘The Beast’ that is the GBP/JPY currency pair, it's important to understand the market mechanics before trading the market with your hard-earned money.

As with all other forex pairs, the market is displayed as GBP/JPY, which is the ticker symbol for the pair. It’s the ticker symbol you’ll need to find when you want to open and close positions on the ‘Geppy’.

How much does it cost to trade the GBP/JPY forex pair?

With most online forex trading platforms, the GBP/JPY ticker symbol will have two prices displayed alongside it. The first is known as the ‘bid price’. The bid price is the price available to those wishing to sell GBP/JPY. The second price is known as the ‘ask price’. The ask price is the price available to those wishing to buy GBP/JPY.

The difference between the bid price and the ask price is what’s known as the bid-ask spread. The bid-ask spread is a trading cost. Depending on the account and pricing model, costs may be reflected in the spread and/or commissions/fees.

Bid-ask spreads are one of the most common costs incurred with trading forex pairs like GBP/JPY. The gap between the bid and ask prices is usually the smallest with the major currencies involving the US dollar. The spread can be much wider between the bid and ask prices on some of the minor currencies and especially on the ‘exotic’ currencies which involve fiat currencies from developing or emerging nations.

The tighter the bid-ask spreads the less your open position on GBP/JPY has to move to enter profitability. Day traders buying GBP/JPY with a three-pip difference between the bid and ask price will know that their entry position has to move just four pips to their advantage to be profitable. The bid-ask spread on GBP/JPY varies by broker, account type and market conditions, and can widen materially in fast markets. That’s why it’s so attractive to swing traders that thrive on market volatility.

How the outside world can influence the GBP/JPY pair

Although it’s possible to use technical indicators to pinpoint opportunities to buy and sell GBP/JPY, many newcomers to forex trading may also use fundamental analysis. By simply interpreting decisions and announcements made by the central banks of the UK and Japan, as well as their respective governments, it’s possible to get a handle on the general direction of a country’s economy.

Decision-making from central banks

The Bank of Japan is notorious for being one of the most active central banks in the forex market. At the heart of the Bank of Japan’s decision-making is the preservation of the nation’s exports, which play such a key role in the Japanese economy thanks to its tech and industrial sectors. You can glean a lot from the Bank of Japan’s monthly rate releases.

Each release has a rate statement attached, explaining the backdrop of the economy and their reasoning for maintaining or changing the base rate.

If you're someone that prefers trading fundamentals like news releases, statements and press conferences, these Bank of Japan rate statements can provide a general overview of the current landscape and the short-to-medium-term trends.

It’s a similar story with the Bank of England, with their own rate statements providing a sense of the direction of travel for the British economy in the months ahead. If one economy appears to be struggling or making dovish statements more so than the other, it can be one factor traders watch when forming a view on GBP/JPY.

Many carry traders read these statements from central banks for reassurance before taking their positions. Historically, Britain has had much higher interest rates than the Japanese.

In fact, the Bank of Japan has opted for zero or even negative rates in recent decades to facilitate spending and growth. If that stays the same, carry traders will continue to take a long (buy) position in the GBP/JPY and short (sell) JPY overnight to earn positive swap interest.

Of course, the risk in these trades is that short-term volatility can appear, potentially wiping out those material gains.

The price of energy commodities

Aside from interest rates and policy announcements from the central banks, the most dependable barometer to gauge GBP/JPY sentiment is energy commodities. The UK produces and trades oil and gas, but GBP/JPY is more commonly influenced by interest-rate expectations, risk sentiment and macroeconomic factors; Japan’s energy import dependence can be one of several considerations.

It also is one of the leading importers of natural gas. This leaves the Japanese economy highly vulnerable to fluctuations in the price of global energy commodities.

Other factors that can influence the price of energy commodities (i.e. crude oil and natural gas), and add pressure to the Japanese economy, include inflation and global political volatility.

Domestic politics

Governmental policy in both the UK and Japanese governments can also bear the direction of the GBP/JPY currency pair. General elections and public referenda are some of the key triggers for volatility in the British pound. Both of which can bring a sense of instability to the economy for a period.

It’s a similar story to the Japanese government. The view of the Japanese yen largely relates to what the government is lobbying for in terms of monetary policy and growth strategies. Ultimately, a Japanese government that seeks to maintain or improve upon the nation’s export industry is more likely to have a positive impact on the yen.

The history of the GBP/JPY pair

The GBP/JPY brings together two of the most historic fiat currencies in modern times. Since the 17th century, the British pound has been one of the most influential currencies. The Japanese yen has been the native currency of Japan since 1871, when it was introduced by the Meiji administration to usurp the proliferation of Spanish dollars in circulation across the country in the mid-to-late 19th century.

Historically speaking, the yen has been one of the cheaper fiat currencies to buy in the Asia-Pacific region. This has long been a target of the Bank of Japan to ensure exports remain at good value. However, as the value of the Japanese economy has grown, so has the price of the yen.

Although the GBP/JPY currency pair remains highly unstable, the long-term trend has seen the yen strengthen considerably against the pound. Over the long term, GBP/JPY has moved substantially (for example, it traded above 400 JPY per GBP in the early 1980s and around the 160s–170s in parts of 2022).

The price of GBP/JPY has fluctuated significantly in more recent times. The pound had recovered in June 2007 to 250 yen to the pound, but the onset of the global recession saw the pound weaken significantly by January 2009 to 120 yen to the pound.

The UK’s Brexit referendum and subsequent vote to leave the European Union saw the yen strengthen against the pound from 166 yen to the pound down to 133 yen to the pound.

Some data sources cite an historical high near 1,014 JPY per GBP in 1963, but historic exchange-rate series and methodologies differ; treat very long-dated extremes as illustrative.

When to buy the GBP/JPY pair

Some traders may look at GBP/JPY differently depending on factors such as growth, inflation and interest-rate expectations in the UK and Japan. A good benchmark for when GBP is strong in the forex markets is solid GDP and controlled rates of inflation.

When to sell the GBP/JPY pair

In terms of the best market conditions for selling GBP/JPY, you would want the Japanese economy to consistently outperform the British economy. This would cause the Japanese yen to grow in value against the British pound. Short exposure can be obtained through different instruments (including CFDs where available). CFDs are complex, leveraged products and can result in losses exceeding your initial deposit. They aren’t suitable for everyone.

CFD trading allows you to make a profit when an underlying asset’s value diminishes, for example, the fall of a currency like the British pound. The profit or loss from shorting a currency pair like GBP/JPY is based on the price difference between your entry and exit positions.