A decline in the Japanese manufacturing index in the April-June quarter and the possibility of a soft Brexit convinced us to forecast a rally in the GBPJPY pair on June 14. The report also indicated our interest in opening a long position in the GBPJPY pair at 139.60, with an aim to book a profit near 142.
We had also expressed our interest to invest in a call option. Both trades finished in profit as the currency cross-shot up to a high of 142.50 within a week. The pair continued to move up to record a high of 147.50 last week. We anticipate a short-term correction in the GBPJPY pair due to the reasons mentioned below.
Last Friday, the Office for National Statistics reported a 0.2% m-o-m decline in manufacturing production in May. The reported figures were worse than analysts’ estimates of 0.5% growth. Last month, manufacturing, which makes up for nearly 80% of total industrial production, grew 0.2%.
Likewise, the trade deficit widened to £11.9 billion in May, from £10.6 billion in the previous month. The market was expecting a trade deficit of £10.8 billion. Other crucial sectors of the economy reported a decline as well. The construction output declined 1.2% m-o-m in May, while the industrial production declined 0.1% m-o-m in May. Analysts had expected construction output and industrial production to increase 0.6% and 0.4%, respectively, in May.
The Japanese Ministry of Health, Labor, and Welfare reported a 0.7% y-o-y increase in wages in May, versus the market’s expectations of a 0.4% increase. It is the fastest pace of wage growth in the past 17 years. The wage growth has turned positive for the first time in five months. The real wage increase has also created hopes of an increase in consumer spending, which would ultimately lead to an increase in the inflation rate to about 2%, which is one of the main aims of the Bank of Japan. Thus, weak economic data is expected to turn the Pound weak against the Yen.
Technically, the pair has violated the ascending trend line. The GBPJPY pair has also started declining after facing resistance at 146.80. The momentum indicator has made a negative divergence with the price, while the stochastic indicator is declining. Thus, we can expect the pair to reach the next support at 143.80.
On the basis of the above discussion, we are looking at the possibility of opening a short position in the GBPJPY pair at 146.80. To minimize risk, a stop-loss order would be placed above 147.80. The profit would be booked near 143.80.
To increase returns, we are also considering investing in a low or below option offered by a binary broker. We prefer a strike price of 146.80 and option expiry period of one week.
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.
