Pound Down on Widened Trade Deficit, Brexit Uncertainty

Pound Down on Widened Trade Deficit, Brexit Uncertainty
January 11, 2018

The 24-year low unemployment rate, trade surplus, and higher-than-anticipated inflation rate is strengthening the Yen against the G10 currencies. In particular, the Yen has considerably strengthened against the Pound in the past few trading days. From a high of 153.60, the GBPJPY pair has fallen to a low of 150.55. We expect the current decline to continue due to reasons given below.

Speculators and investors believe that Brexit has once again taken a centre stage in determining the direction of the Pound. However, Esther Reichelt, an analyst at Commerzbank believes that the trade talks will result in an agreement only in the final hours. Since the next deadline is only in October, Reichelt believes that trade talks will not move forward as of now. The uncertainty will also make the investors stay away from the UK. Further, the weak economic outlook will discourage the Bank of England from raising interest rates again. Overall, after a stupendous rally for the past six months, the Pound is signalling a major trend reversal. In addition, the economic data reported yesterday is unlikely to lend support to the Pound.

The UK Office for National Statistics reported a 0.4% m-o-m increase in the manufacturing production in November. The reported figures were only a notch higher than the 0.3% growth anticipated by economists. In the previous month the manufacturing production grew 0.3%. It is the first Index of Production release to incorporate Value Added Tax (VAT), using data from over 75,000 businesses across 64 industries.

In another report, the UK Office for National Statistics reported a widened trade deficit of £12.2 billion in November, versus analysts expectation of £10.9 billion. In October, the country recorded a trade deficit of £10.8 billion.

The ONS also reported an improvement in the construction output in November. On a m-o-m basis, the construction output increased 0.4%, against analysts expectation of a 0.7% growth. However, it was better than the 1.1% contraction reported in the earlier month. The positive sentiment created by an improvement in the construction industry was offset by the widening of trade deficit. So, neither Brexit related developments, nor economic data is supporting the Pound.

In case of Japan, on Tuesday, the Labor Ministry reported a 0.9% y-o-y increase in average cash earnings in November, up from a 0.2% increase in the earlier month and greater than 0.6% rise anticipated by analysts. Thus, we can expect the decline in the GBPJPY pair to continue.

Technically, the GBPJPY pair has broken the support at 152.80. The stochastic oscillator is declining. That indicates a weakness in the currency pair. Thus, it would be prudent to trade a short position in the currency pair.

GBPJPY - Technical Analysis - 11th January 2018

In the Forex market, we may establish a short position in the currency pair near 151.40. To minimise risk, a stop loss order will be placed above 152.80. If the pair descends, then we will cover our short position near 148.10.

Additionally, to boost the overall returns, we may also acquire a put option offered by a binary broker. Before investing our surplus funds, we will make sure that the option is valid for seven trading days and the pair is trading near 151.40 in the spot Forex market.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.



Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world

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