GBP/JPY drops to two-week lows, around 139.30-25 area

• GBP/JPY extended its recent sharp pullback from multi-month tops set last Tuesday.
• The not so comforting Brexit-related headlines weighed heavily on the British pound.
• The market focus will remain glued to the latest round of Brexit talks, starting today.

The prevalent selling bias surrounding the British pound dragged the GBP/JPY cross to fresh two-week lows, further below mid-139.00s during the early European session.

The cross added to the previous day's heavy losses and remained depressed for the second consecutive session on Tuesday. The downtick also marked the third day of a negative move in the previous four and was exclusively sponsored by the GBP price dynamics. The sterling weakened across the board after the UK Prime Minister Boris Johnson threatened to walk away from Brexit talks if a deal is not reached by mid-October.

Adding to this, a Financial Times report suggested that the UK government might legislate to override the Brexit withdrawal agreement with the European Union (EU). The EU reacted to the news and warned that there would be no deal if that happened. This, in turn, fueled market worries that the UK could crash out of the EU at the end of the transition period on December 31, which, in turn, took its toll on the British pound.

On the other hand, the Japanese yen has been struggling for a firm direction and did little to influence the GBP/JPY cross. The eighth round of Brexit talks are set to begin in London later this Tuesday and the incoming headlines will play a key role in driving the sentiment surrounding the pound, rather infuse some volatility.

From a technical perspective, the GBP/JPY cross on Monday broke through a strong horizontal support near the key 140.00 psychological mark. The subsequent technical selling might have already set the stage for an extension of the depreciating move. Hence, some follow-through weakness towards testing sub-1.3900 level, en-route the 138.30-25 support area, now looks a distinct possibility.

Technical levels to watch