The UK economy has a major report coming up on Thursday and Mr. British Pound (GBP) could be affected. In my previous GBP JPY forecast I mentioned that the majority of forex traders were bullish the Pound versus the Japanese Yen. How has our outlook changed in the past week and what could we expect from the pair in the coming days? Stay tight for a 360 Invest Diva’s Diamond Analysis covering the UK economy, technical analysis and market sentiment.
UK Economy
David Cameron believes that more than £30bn worth of investment deals will take place between the UK and China in the coming days, as President Xi Jinping landed in London for a four day official state visit.
Energy and finance seem to be the major sectors, with a new nuclear reactor in the UK being set to be designed, funded and built by the Chinese. On the finance side of things, it’s looking like the UK will be the first financial center outside of Hong Kong to handle a renminbi denominated bond auction.
EU has made UK economy more dynamic, says BoE head
Mark Carney, the governor of the Bank of England (BoE), said that the European membership opened up the UK economy and made it more dynamic, but also left it more exposed to financial shocks. He noted that “Flexibility is key to staying in EU.”
In an intervention likely to be seen as strengthening David Cameron’s hand as he prepares to enter negotiations with Britain’s EU partners, Carney challenged the prime minister to demand “clear principles” to safeguard Britain’s interests outside the euro, as he warned that botched European integration could threaten financial stability.
The comments didn’t really strike British currency but could be a good sign for its future.
UK September Retail Sales coming up
The September retail sales report is expected to show an improvement by 0.3%. The retail sales report for August was a bit mixed since the headline reading came in as expected at 0.2%, which is good since it is an improvement over the previous reading, even though the previous reading was downgraded from 0.1% to flat at 0.0%. That kinda made Mr. British Pound to keep his cool during/ after the report.
For this time, if you are planning to trade the news (not recommended) just remember that the pound usually has a knee-jerk reaction to the report relative to expectations, so a better-than-expected reading usually sparks a rally while a worse-than-expected reading usually triggers a sell-off.
For a longer-term point of view it is important to also keep an eye on the progress of the reading comparing to previous reading, which could set the tone of GBP moves for the coming weeks.
UK Economy Summary:
The Britis have been sending out mixed signals when it comes to their economy. The most pleasing news for them has been the rise in wages, while on the other side the inflation and retail price index are back to negative.
Japanese Economy
The Japanese are not known for taking surprise actions when it comes to their economy, at least comparing to some other nations in Asia (cough, China). However, Japan’s annual export growth slowed sharply in September as shrinking sales to China hurt the volume of shipments, raising fears that weak overseas demand may have pushed the economy into recession.
Ministry of Finance data showed exports rose just 0.6 percent in the year to September, against a 3.4 percent gain expected by economists in a Reuters poll. That was the slowest growth since August last year, following the prior month’s 3.1 percent gain. The weak yen helped increase the value of exports, but volume fell 3.9 percent, the third straight month recording an annual decline.
Looking at the Bank of Japan (BoJ) minutes from their meeting in September, policymakers last month confirmed the importance of continuing to closely monitor effects from slowing growth in emerging economies, including China, on the global economy.
These sort of news however come is such smooth Japanese style Kimon dance that the Japanese yen doesn’t really get affected by it, and continues to get led by its pears on the forex dance floor.
Technical Points
Since we last checked the GBP/JPY daily chart,the pair has moved back above the 23% Fibonacci level but has yet to reach the Ichimoku cloud and a key resistance level at 185.20.The RSI however has moved back above the neutrality area which could be a sign of further gains coming up.
Taking a look at the monthly chart, we realize that the pair has been in an uptrend since 2012 with 194.50 set as a bullish target. Turning back our dear friend, Mr. Fibonacci, this time on a longer time frame, we could argue that the recent drops may be a mere retracement towards the key Fibonacci retracement levels, and there still is a possibility of the prices to move back up after the pullback is completed. The first support falls on the 23% Fibonacci level at 177.
Market Sentiment
According to the sentiment index from one of the largest brokers in the US, only 46% of forex traders are in a bullish position in the GBP/JPY pair. Backed up by research, the majority of forex traders are wrong when it comes to taking positions in the market, so we can use this as a contrarian indicator. In which case, we can argue that the market sentiment will switch to bullish pretty soon, which backs up our technical analysis as well.
GBP JPY Forecast | Forex Trading Strategy
We’ve got two bullish points from the Invest Diva Diamond; Technical and sentimental analysis. As per fundamental analysis, look for a better than expected (and than previous reading) outcome for tomorrow’s UK retail sales, to confirm a bullish scenario for the GBP JPY forecast.
Alternatively, if the pair suddenly decides to go nuts and breaks below 180.50, our outlook would change to long term bearish with 177.50 as first alternative target. Either way, make sure you have your stop loss order in place so that your account doesn’t get carried away by unexpected market reactions. In any case, use the following support, resistance and pivot levels for calculating your profit taking target, your leverage and exit strategy.
| Support Levels | Turning Point | Resistance Levels |
|---|---|---|
| 180.50 | 185.90 | 189.30 |
| 177.50 | 187.50 | 194. |
Important Note: The support and resistance levels are not suitable for all traders and largely depend on your account size, margin and leverage. Book a private lesson to learn how to personalize your account based on our trading guide.
