The Japanese yen has been steadily gaining ground against the G10 currencies for the past one month. The Moritomo Gakuen land scandal has been one of the main reasons for the yen’s rise. The scandal has increased uncertainty in Japan. In fact, there are reports that the Japanese prime minister is planning to resign in June.
Uncertainty usually strengthens the yen and is no different this time. The Pound, in the meanwhile, weakened due to a series of weak economic data (retail sales, wage growth, etc.,). Since mid-April, the GBPJPY pair has declined from 153.70 to 150.50. We expect the bearish trend to continue due to the reasons given below.
Japan’s industrial production grew 1.2% in March, according to the preliminary data reported Friday by the Ministry of Economy, Trade and Industry. The reported data were higher than the 0.5% growth anticipated by analysts. In the previous month, industrial production increased 2%. Apart from economic data, currency strategists have pointed out numerous reasons for a possible rise of the yen.
Maxime Alimi, head of the investment strategy at Axa Investment Managers, is of the opinion that the tight labor market, low levels of unemployment, and a steady increase in full-time work would soon lead to an increase in wages. Ultimately, this would result in an increase in inflationary pressure. The assumption is the BoJ, tasked with managing inflation, may have to react by raising interest rates and end the QE program and this would strengthen the yen.
Furthermore, according to Purchasing Power Parity (PPP) model, the yen is undervalued by about 10% and analysts expect the currency to soon move back to its fair value. The USDJPY is currently trading at 109, which is way higher than the PPP fair value estimate of 100 yen to the dollar.
In the UK, the Office For National Statistics (ONS) reported first-quarter GDP growth of 0.1%, much below the analyst’s expectation of 0.3% and lower than the previous quarter’s growth of 0.4%. It is the lowest recorded growth since 2012. The construction sector contracted by 3.3%. However, the services industries grew by 0.3% in the quarter ended March 2018.
Notably, the ONS categorically reported that the decline in the UK economic growth is not purely due to harsh weather conditions. The broader economic slowdown clearly indicates that there are practically no chances of an interest rate hike in May.
Neil Jones at Mizuho Bank Ltd believes the slowdown is more structural. Samuel Tombs, Chief UK Economist with Pantheon Macroeconomics said “The chance of a May rate hike is now close to zero following the slowdown in GDP growth in Q1.” The facts discussed above indicate the possibility of a further decline in the GBPJPY pair.
The price chart indicates a major resistance for the stock at 152.80. Furthermore, the stochastic oscillator is descending towards the bearish zone. The next major support for the stock exists only at 148.80. Therefore, we are expecting the currency pair to move down in the short-term.
In order to gain from the downtrend, we are considering opening a short position near 150.60, with a stop-loss order above 151.60. We shall book our profit near 148.40 if the forecast turns out as expected.
Additionally, in the binary market, we may acquire a put option contract. To proceed further, we require the contract offered by a binary broker to be valid for one week. Furthermore, the GBPJPY pair should be trading near 150.60 in the Forex market.
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.
