Mr. British Pound seems to be struggling a bit and losing the currency dance battle against Ms. USA (US dollar). But how is he doing versus the Japanese Yen? Let’s take a look at the UK economy and Japan’s situation, and bake them all in together with technical analysis on GBP/JPY to conclude a rocking forex trading strategy as the pair shakes it up on the forex dance floor.
1- Bank of England is not in a hurry to raise interest rates
Whoops . There goes Mr. British Pound’s hope to kick Ms. USA’s butt. While in the US, a December interest rate hike potential is getting higher, Bank of England (BoE) officials signaled Tuesday that they are in no hurry to raise interest rates in the U.K., citing concern about whether price pressures are strong enough yet to meet their inflation goal.
This came in just days after the central bank trimmed its growth and inflation forecasts, and its monetary policy committee voted 8-1 to keep rates unchanged.
While growth and GDP remain the main concerns for the UK economy, falling unemployment and other factors are supporting the case where BoE would need to be raising interest rates sooner rather than later.
According to financial instruments that track BoE’s benchmark rates, Invest Divas expect the central bank to raise interest rates in late 2016 or early 2017.
2- Bank of Japan refuses to increase stimulus
It seems that the Japanese central bank (BoJ) has no plans of expanding its current easing program anytime soon. The happy-go-lucky mentality continues, despite the downbeat economic reports such as the fact that Japanese retail sales data missed expectations, Q3 growth fell by 0.2%, and wages have been mildly growing.
Seeing all this, BoJ policymakers put on a happy anime face and assessed that the Japanese economy has continued to recover moderately! They even went on to say that private consumption remains resilient, thanks to improving labor and income conditions.
No wonder Ms. Japanese Yen remains confused and prefers to just range and give the lead to other currencies.
Japanese central bank officials admitted that export activity and business production have weakened due to the slowdown in emerging markets, underscoring the latest trade balance release which indicated that shipments in October fell for the first time in more than a year.
In terms of price levels, BoJ Governor Kuroda insisted that inflation expectations appear to be rising and that the economy can achieve its 2% CPI target by the second half of next year. Looking at the latest inflation readings, however, suggests that Japan still has a lot of work to do before moving closer to its goal. Producer prices are down 3.8% on a year-over-year basis in October versus the projected 3.5% decline while the core CPI readings in Tokyo and the entire country are still in the negative territory.
Ms. Japanese Yen has been getting a bit of a strength on the BoJ notes against his major counterparts, as there seems to be low likelihood of additional BOJ easing despite weak data.
3- GBP/JPY range continues
Despite the long-term bullish signals piling on the monthly chart, in the short term we could see more range moves between 187 and 182.
The pair tried breaking above the Ichimoku cloud last week, but it was a false alarm, and it dropped massively later on after UK retail sales missed expectations. The pair is now back inside the Ichimoku cloud and heading towards the pivot level of 182.
Investing Strategy
Adding the fundamentals and technicals to our Diamond Analysis bowl, it seems the pair could continue ranging with a chance of further downward pressure in the short-term.
Bearish Scenario: While we are looking for more zig-zag moves in GBP/JPY, a break below 182 could open doors to further declines towards 23% Fibonacci retracement level at 176. This is more of a short-term scenario and could even happen before the New Years ball drops in NYC.
Bullish Scenario: Alternatively, if the pair decides to go nuts and break above the Ichimoku cloud and 187 price level, we could expect further upward pressure towards previous highs of 193. This scenario has a much lower chance of happening within 2015, considering the current fundamentals. So we may need to put this scenario off until more we hear more hawkish stuff from BoE governor Mr.Carney.
Here are the recommended supports and resistance levels* for short term forex trading strategies:
| Support Levels | Turning Point | Resistance Levels |
|---|---|---|
| 182 | 182 | 187 |
| 176 | 187 | 193 |
In any case, set your stop loss and profit targets a little loose from the below levels, because the naughty currency pairs sometimes change their mind right before a psychological level just to piss the forex trading crowd off. This technique helps you avoid getting kicked out of your trading position prematurely.
*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.
