Considering the weak lending data announced by the Bank of England and soft retail spending in December, we had recommended taking a short position at 142.50 levels in the GBPJPY pair on February 1st, with a target price of 139.50. To binary traders, we had suggested purchasing a put option or a similar contract with a one week expiry period. In a week’s time, both trades ended in profit. The weak fourth-quarter GDP data (preliminary) of Japan enabled the cross to recover to 141 last week. However, we believe that the GBPJPY pair would turn bearish in the near future due to the details presented below.
The UK’s plan to quickly push through a trade deal with the EU before 2018, has come to an abrupt halt. Michel Barnier, the EU’s chief negotiator, has stated that he prefers to negotiate Britain’s exit from the EU before anything else. This includes the €60 billion (£51.3 billion) exit bill and rights of expatriates. As expected, David Davis, the UK’s Brexit secretary, has called the sequential plan of Barnier “impractical”.
Analysts have also pointed out that the British Prime Minister Theresa May has not taken the Brexit related difficulties and liabilities into consideration until now. The EU based hardliners believe that the Brexit negotiations should take place on a step-by-step basis. Economists believe that such a scenario will drag the deal over a period of five or more years.
The impact of Brexit, which economists had warned long back, is beginning to show up. According to the UK Office for National Statistics, retail sales declined 0.3% m-o-m in January. Analysts had expected the retail sales to grow by 1%. In December, the retail sales dipped by a downwardly revised 2.1%. Notably, the Office for National Statistics also reported a lower than anticipated increase in the average earnings index to 2.6% in December, versus the market’s expectation of 2.8% growth.
The upcoming French election and Brexit related developments have increased the political uncertainty, thereby resulting in an increase in demand for safe-haven currencies such as the Yen. Thus, fundamentally, we can expect the GBPJPY pair to undergo a bearish reversal soon.
Technically, the GBPJPY pair is expected to face major resistance at 142.20. The negative reading of the MACD indicator confirms the lack of momentum. So, the pair can be expected to reverse and retest the support level of 139.20.
By going short in the GBPJPY pair near 142.20, a Forex trader can gain from the forecasted decline. To prevent large losses, a stop-loss order should be certainly placed above 143.20. The short position can be covered near 139.20.
A put option contract can be bought to create an identical setup in the binary market. The contract can be picked up when the currency pair trades above 142. As far as the contract expiry date is concerned, the trader should choose a date around March 2nd.
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.
