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What a day it has been for GBP/JPY! The currency pair dropped to a low of 169.25 on the back of weaker U.S. retail sales but managed to recover and recapture 170 by the end of the North American trading session. This intraday rally was driven by a turnaround in U.S. stocks and the market’s realization that soft spending will keep the Fed tapering at a very measured pace. Sterling remains strong, adding to the gains it first enjoyed after yesterday’s BoE Inflation Report. With no U.K. data on the calendar tomorrow, we expect a sustained rally in sterling because the BoE’s shift in strategy and upgrade to their GDP forecast represents a significant shift in their monetary policy outlook. The central bank now sees the economy growing 0.5% faster than they initially anticipated this year, which means they could also accelerate their plans for tightening. Their rosier outlook for the economy has driven U.K. yields sharply higher and we believe they will continue to rise, providing support to the GBP. As for USD/JPY, the currency pair’s resilience in the face of weaker retail sales is nothing short of impressive. Its move back above 102 puts 103 in sight.
170 is a very significant resistance level in GBP/JPY. It capped gains back in December and was a breakdown point in January. The currency pair first attempted to break 170 on Wednesday but overnight it gave up its gains to trade back down to 169.25. As of the North American close, it is trying once again to muster a meaningful move above 170 and we hope the second time is the charm. There is no major resistance above 170 until the 171.20-40 range and above 172, the currency pair could hit fresh multiyear highs. If GBP/JPY drops below 169, we could see a stronger reversal down to 168.