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Forex Analysis & Reviews: GBP/JPY. Win-win lottery: a weak pound and a promising yen
time 05.07.2019 09:12 AM
time Relevance up to, 05.07.2019 08:18 PM

Friday's Asian session was held without any clear price fluctuations: traders are still waiting for fundamental guidance.

The key event of the last trading day of the week will be the publication of Nonfarm, so it's not advisable to trade in dollar pairs today - at least until the release of this data. Increased volatility is expected regardless of the dynamics demonstrated by the US labor market. If the numbers exceed weak expectations, the dollar will receive support throughout the market, since the probability of monetary policy easing at the July Fed meeting will inevitably decrease. In the opposite case, the greenback will again fall under the wave of being sold, especially against the background of a slowdown in other macroeconomic indicators, especially in the area of production. In any case, Nonfarms will cause a stir among market participants, which will be strengthened by the "Friday factor". Due to this fact, you should not rush to open positions in dollar pairs, as already on Monday the market mood regarding the prospects for the greenback may change. Trading on the news (market emotions) is not the most reliable strategy, so today it is better to consider trading with crosses.

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Among the cross-pairs, the most interesting one is the pound/yen pair. In general, the British currency is now going through hard times, so most Britons are very vulnerable. This vulnerability is most clearly manifested against the background of the yen (as, for example, paired with the euro, the pound is stuck in a narrow band flat). In terms of the foundation, the Japanese currency reacts to an external fundamental background, while the pound is fully focused on the prospects for Brexit. Such a clear distinction and relative "independence" from the flow of statistical reporting raises the pair's appeal.

The game against the British currency is fully justified - at least for the past two months. At the beginning of May, the GBP/JPY pair was trading in the area of the 145th figure, whereas now it is in the area of the 135th level. In just two months, the cross collapsed by 1000 points, and most importantly, this price dynamics was easily predictable, given the recent events in British politics. Moreover, the downward movement's potential is not exhausted, so any attempt to pull up GBP/JPY can be used as a reason to open short positions.

Please note that even the trade truce between the United States and China had a weak effect on the cross rate. The yen, which sharply responds to the dynamics of anti-risk sentiment, weakened against the pound by only 60 points, but then won back its losses with interest. Firstly, the general optimism of the market after the G-20 summit had a short-term "shelf life". Rather tough statements by Trump's economic advisers, who clarified the White House's position, offset the traders' optimistic expectations. Huawei remains on the "black list", mutual concessions between Beijing and Washington are formal, and trade negotiations, according to Navarro, will not be an "easy walk", despite the desire of the parties to find a compromise. In addition, Trump's tone was not peaceful for long: a couple of days ago, he again voiced claims to China (as well as Europe), accusing the Chinese of manipulating the national currency. This tweet caused analysts' concerns about the fact that the US president may soon start a currency war by initiating a currency intervention. Such assumptions made it possible for the yen to strengthen its position against the background of a wave of anti-risk sentiment in the market.

But the pound is still under pressure from Brexit. At the end of July, 160,000 members of the Conservative Party will vote for a new party leader, who will then head the government. Both finalists - Johnson and Hunt - are ready to withdraw the country from the European Union without a deal and are ready not to pay (Hunt - partially) 39 billion pounds of "compensation" to Brussels. Moreover, each of them opposes the regular postponement of Brexit, regardless of whether they succeed in agreeing a new text of the deal with Europe or not. The European side, in turn, monotonously repeats the mantra that the deal has already been agreed with the British government and is not subject to revision. The outcome of this confrontation is predictable: the "hard" Brexit can become a reality already on October 31. Traders still have a weak hope that the deputies of the House of Commons will not allow the realization of such a scenario (up to the announcement of a vote of no confidence in the new prime minister), but these assumptions are too unsteady to affect the pound's position, at least in the medium term.

Thus, the fundamental picture for the GBP/JPY pair is quite unique. The grim prospects of Brexit against the background of uncertain prospects of the US-China negotiations are supporting the yen, negatively influencing the position of the British currency.

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We will turn to the pair's daily chart if we are talking about price levels. At the moment, the price is being traded between the lower and middle lines of the Bollinger Bands indicator, which indicates a downward trend. Therefore, the upper limit of the corrective pullback is limited by the resistance level, which corresponds to the price of 136.50. This mark can be used as a stop loss. In turn, the downward movement's target is the mark of 135.05 - this is the bottom line of the Bollinger Bands indicator on D1.

Irina Manzenko,
Analytical expert of InstaForex
© 2007-2022
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