GBP/JPY – Headed for 190?

GBP/JPY – Headed for 190?

GBP/JPY – Headed for 190?

We like the GBP and we like USD/JPY, which makes us extremely bullish GBP/JPY. This would be a pair that we normally would pick for a Big Trade if not for the fact that the currency is trading near the top of its recent range and we would need a deeper correction that is unlikely to occur before the Bank of England meeting and Quarterly Inflation Report – the 2 catalysts that we believe will drive sterling sharply higher. Since the October monetary policy meeting, there has been significantly more improvement that deterioration in the U.K. economy. Retail sales rose strongly in September, the unemployment rate declined, wages increased and service along with manufacturing activity accelerated. Although consumer prices eased, which is a big problem for the central bank, the uptick in PPI and the rise in market indicators should keep the central bank optimistic. The BoE is not looking to raise interest rates at this time but the improvement in the economy could lead to upgraded economic forecasts and/or encourage one additional MPC member to join Ian McCafferty in voting for an immediate rate rise. At the same time, USD/JPY is supported by today’s hawkish comments from Yellen and Dudley who both say that December is a live meeting for a rate hike. U.S. data has also been very good with service sector activity expanding at its second strongest pace in 10 years. More importantly, the employment component of the index rose to its second highest level since August 2005. The last time we saw a number this strong was in July 2015, the month that non-farm payrolls rose 223k. ADP declined slightly from 190K to 182K but the strength of ISM, low level of jobless claims and the optimism of the Fed make us confident that non-farm payrolls will rise by at least 200K.

Technically, there’s quite a bit of support below current levels in GBP/JPY. This includes the 200-day SMA at 185.80 and the 38.2% Fibonacci retracement of the June to September decline at 186.23. Resistance is between 188 (the 50% Fib of the same move and 188.50, the 100-day SMA. So while we believe GBP/JPY is headed for 190, it could make a long pit stop near 188.

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