Better than expected services PMI (Purchase Managers Index) enabled the Pound to extend gains against other currencies such as the Japanese Yen last week. The Pound was also strengthened by the fact that the data from the Bank of International Settlements (BIS) showed that London continues to hold the top spot in Forex trading. The value of orders routed per day from London in April was $2,426 billion and far higher than the $1,272 billion worth trades per day made from New York, which holds the second position. On the contrary, the Yen became weak due to an increase in the investors’ appetite for riskier assets. The GBPJPY pair hit a high of 137.118 on September 9th. We believe that the GBPJPY pair’s upswing has ended for the time being due to the reasons explained below.
The fiscal stimulus announced a month before by the Bank of Japan did not convince the market in any manner. This gave an opportunity for the bulls to prop up the Yen against the major rivals such as the US dollar and the Pound. However, better than anticipated US employment data announced last week has enabled the rival currencies to capture the lost ground against the yen. However, it may not last long. This week, the BoJ is scheduled to release its “Summary of opinions” from the monetary policy announcement made on July 29th. BoJ’s acknowledgment of its inability to weaken the Yen would certainly lift the currency once again.
The rebound in the UK services PMI to 52.9 in August ensured a strong rally in the Pound. However, what went unnoticed is the 0.9% decline in the UK index of production (IoP) in July. It was far lower than the analysts’ expectation of a 0.4% decline. It was the first post-referendum IoP data released by the Office for National Statistics. On Wednesday, the institution also stated that the Consumer Price Index (CPI) increased 0.6% y-o-y in August. However, the reported data were below the analysts’ expectation of 0.7% growth. On a m-o-m basis, the Producer Price Index (PPI) rose 0.2% in August, against analysts’ expectation of 0.6% growth. Similarly, the core CPI rose 1.3% y-o-y and missed the analysts’ expectation by a margin of 0.1%.
Many analysts believe that the negative effect of Brexit has begun to show up. Ultimately, such a scenario is likely to keep the GBPJPY in a short-term downtrend.
The historic price chart indicates resistance for the GBPJPY pair at 135.40. Minor support (S1) for the currency pair is seen at 133.80, while the major support (S2) is seen at 132.70. Both the main and signal lines of the MACD indicator are trading below the zero line. Thus, we expect the GBPJPY pair to decline and test both the S1 and S2 level.
Considering the weakness, a short position can be opened near 135.40 by a Forex trader. To avoid huge losses, a stop-loss order can be placed at 136.20 or higher. The short position can be covered near 134 levels.
Trading a one-touch put option would enable a trader to gain from the GBPJPY pair’s decline. The strike price, however, should be greater than 133.80. Finally, the contract should remain valid for at least one month.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
