The Pound rallied against the G10 currencies, following the announcement of snap elections by the UK Prime Minister Theresa May in April. Strong industrial activity and retail sales data also supported the Pound’s rise. On the other hand, the Yen topped the list of the worst-performing currencies. Lower than anticipated trade balance and the Bank of Japan’s accommodative policy kept the Yen weak. However, beginning last week, the GBPJPY pair has started declining after reaching a high of 148.10. What started as a simple correction has now turned into a deep decline. The GBPJPY pair, which is now trading at about 142 levels, is expected to move down further in early June due to the reasons mentioned below.
A recent poll conducted by YouGov indicates that the leader of the Conservative party over the Labour party has narrowed to a mere 5%. When May announced snap elections, the market pushed the Pound upwards with an assumption that the Conservatives would win by a huge majority. However, that no longer seems to be the case. In fact, the market is now counting on the possibility of a coalition government or an outright victory for the Labour party. The outcome of the survey has added another level of uncertainty attached to the Brexit negotiations. The market does not like uncertainty and that is expected to keep the Pound weak.
According to the data reported by Statistics Japan on Tuesday, the unemployment rate was 2.8% at the end of April 2017, the lowest in 23 years, and in line with the market’s expectations. Notably, the inflation rate rose 0.4% in April, compared with 0.2% in the earlier month. Furthermore, the economy grew 0.5% in the first quarter of 2017, the highest in the past year.
Yesterday, the Ministry of Economy, Trade, and Industry (METI) of Japan reported a 3.2% y-o-y growth in retail sales in April, compared with a 2.1% increase in March, and better than analysts’ expectation of a 2.3% rise. It is the fastest pace of growth in the past two years. Thus, fundamentals support the GBPJPY pair’s decline in the week ahead.
The GBPJPY pair has broken the support at 143.90. The next major support exists at 140.10. The cross is moving along the descending channel, as shown in the image below. Furthermore, the RSI indicator is moving below the reading of 50. That indicates a weakness in the momentum. Thus, we expect the pair to remain on a declining note.
In the OTC currency market, we would like to open a short position in the GBPJPY pair near 142.20, with a stop loss and take profit order at 143.20 and 140.10 respectively.
Likewise, we are considering an investment in a put option contract offered by a reliable binary broker. To increase the chances of success, we would only invest when the pair trades near 142.20 in the currency market. Additionally, we prefer June 8th as the option expiration date.
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.
