Yen Turns Weak on Poor BSI Manufacturing Index Data

Yen Turns Weak on Poor BSI Manufacturing Index Data

On May 31st, we had forecasted a weakness in the Pound and also mentioned our interest to go short in the GBPJPY pair at 142.20 levels, with a target of 140.10. Additionally, we had expressed our intention to invest in a put option as well. Following the news of a hung Parliament in the UK, the Pound plunged to a low of 138.70. That resulted in a profit from both the trades. Now, we forecast a short-term bullish reversal in the GBPJPY pair on the basis of arguments provided underneath.

Latest reports indicate that Theresa May will attempt to form a minority government with the support of Northern Ireland’s DUP. That would force the Conservative party to reconsider their previous Brexit plan. Some of the “hard Brexit” plans may be pushed back, and Theresa May would try to reach a cordial deal with the EU. Hints of a soft Brexit deal would likely push the Pound upwards.

According to the Policy Research Institute of Ministry of Japan, the BSI manufacturing index reading declined 2.9% in the April-June quarter, from the 1.1% rise in the prior quarter. Analysts had expected the BSI index, which is a leading indicator of business optimism, to increase 1.5% in the current quarter. The negative reading indicates pessimism among the manufacturers. Additionally, the indicator provides hints of BoJ’s Tankan Survey data released a week later.

Earlier on Monday, the Cabinet Office of Japan reported a 3.1% m-o-m decline in core machinery orders in April. In the previous month, the core machinery orders increased 1.4%. The April 2017 figures were far below from analysts’ estimates of a 0.6% increase in core machinery orders. A decrease in order indicates a slowdown in the manufacturing activity. Thus, considering the UK’s political developments favouring a soft Brexit, and poor economic data from Japan, we expect an uptrend in the GBPJPY pair.

The GBPJPY pair has risen after consolidating at 139 levels, as seen in the chart below. The MACD is moving towards the zero line. The buying pressure is also confirmed by the rising momentum indicator. So, an uptrend can be anticipated soon.

GBPJPY - Technical Analysis - 14th June 2017

A long position in the GBPJPY pair seems to be the right choice as of now. We prefer the entry near 139.60, with a stop loss order below 138.60. If the forecast turns right, we plan to book profit near 142.

We also wish to invest in a call option when the currency cross trades near 139.60 in the OTC market. Ideally, a date around June 22nd would be our choice for the expiry of the option.

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.

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