[Closed +139 pips] Long Term Trade Plan: GBP/JPY
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Friday, 26th July, Week 30: This long-term trade plan for GBP/JPY analyses the pair's price action based on available data and forecasts potential movements over the next five weeks. It aims to provide forex traders with insights to inform their trading decisions. The report covers historical trends, potential market drivers, key economic events, and trade theses.
Trading involves a possibility of losing money therefore all decisions in market speculation are undertaken at your own financial risk.
Sterling's Recent Strength: A Yen-Driven Rally
The GBP/JPY has gained momentum in recent weeks, reflecting the pound's strength against a weakening yen. Over the last four weeks, GBPJPY gained 2.35 percent. Over the last 12 months, its price rose by 11.24 percent. This upward movement can be attributed to the divergence in monetary policy between the Bank of England (BoE) and the Bank of Japan (BOJ). The BoE's hawkish stance on interest rates, aimed at curbing inflation, has supported the pound. Conversely, the BOJ's continued commitment to ultra-loose monetary policy has weighed on the yen.
While no specific historical data for the past five months is available, the recent four-week and 12-month trends suggest a dominant upward trajectory for the pair. Forex traders should be aware of the BOJ's recent indication that it may consider reducing bond purchases at its July meeting. This potential shift in policy could introduce volatility to the yen and impact the GBP/JPY pair. Additionally, the UK Chancellor's statement on Monday about the state of public finances and public spending pressures could impact the pound and consequently the GBP/JPY pair.
Summary: The GBP/JPY has been trending upwards, driven by a strong pound and a weak yen; the BOJ's potential reduction in bond purchases and the UK Chancellor's statement could introduce volatility to the pair.
Five Weeks Ahead: UK Data and BOJ's Decision in Focus
Looking ahead, the GBP/JPY could face volatility in the next five weeks as investors digest key economic data releases and assess the outlook for both UK and Japanese monetary policy. The pair could move upwards if upcoming UK economic data surprises to the upside, reinforcing expectations for further BoE rate hikes. A weaker-than-expected US Q2 GDP report could also weigh on the US dollar, indirectly supporting the pound and potentially boosting GBP/JPY.
Conversely, the pair could move downwards if UK economic data disappoints, particularly if it suggests a slowdown in growth or a softening in the labour market. This could lead to a reassessment of BoE rate hike expectations, weighing on the pound. The BOJ's decision on whether to reduce bond purchases at its July meeting will also be crucial. While a reduction could support the yen and weigh on GBP/JPY, the BOJ is likely to remain cautious about policy normalisation, given Japan's fragile economic recovery and low inflation.
Upside: The GBP/JPY could move upwards if UK economic data surprises to the upside or a weaker-than-expected US Q2 GDP report weighs on the US dollar.
Downside: The GBP/JPY could move downwards if UK economic data disappoints or the BOJ remains cautious about policy normalisation.
Action Points: Navigating the Next Two Weeks
Monitor the release of key economic data from the UK, paying close attention to indicators of growth, inflation, and labour market conditions.
Follow central bank communications, particularly from the BoE and the BOJ, for clues about the future direction of monetary policy.
Pay close attention to the US Q2 GDP report for its potential impact on the US dollar and, indirectly, the GBP/JPY pair.
Monitor the UK Chancellor's statement on Monday for potential impact on the pound and the GBP/JPY pair.
Key Economic Events to Monitor:
Week 31:
Monday, 29th July: UK Chancellor statement on public finances
Tuesday, 30th July: Euro Area GDP Growth Rate QoQ Flash Q2, US CB Consumer Confidence
Wednesday, 31st July: Germany Inflation Rate YoY Flash JUL, Euro Area Inflation Rate YoY Flash JUL, US ADP Employment Change, US Balance of Trade, US Crude Oil Inventories, US Gasoline Inventories, US FOMC Meeting Minutes, BOJ Interest Rate Decision, BOJ Quarterly Outlook Report
Thursday, 1st August: Euro Area Unemployment Rate JUN, US ISM Manufacturing PMI, US Initial Jobless Claims
TRADE THESIS
Short Trade Thesis:
The GBP/JPY's recent rally could be losing steam as the UK economy faces headwinds from high inflation and slowing growth. Disappointing UK economic data in the coming weeks could lead to a reassessment of BoE rate hike expectations, weighing on the pound. Additionally, the BOJ's potential reduction in bond purchases, while likely to be cautious, could still provide some support for the yen. A short position could be justified if upcoming UK data disappoints, the BOJ signals a more hawkish stance than anticipated, or the Chancellor's statement on Monday reveals further economic concerns.
Trade: Short GBP/JPY
Stop Loss: 202.10
Entry: Within 200-pips of 202.1
Take Profit: Consider 196.8
Sources:
Bank of England
Bank of Japan
Trading Economics
Newsquawk
Stratfor
Cabinet Office, Japan
Ministry of Finance, Japan
Statistics Bureau of Japan
S&P Global
Reuters
Bloomberg
Financial Times