GBP/JPY Range Holds as BoE Remains Directionless

The Pound spiked higher as the U.K. economy grew more than expected in the second half adding to the optimism that June’s strong retail sales report initiated. Bullish conviction may be limited as the minutes from the BoE’s last meeting reflected the MPC’s uncertainty over future policy. The potential for stagnating growth and elevated inflation leaves the door open for either additional stimulus or a rate hike by the end of the year. The conflicting option could leave the GBP/JPY confined to its current range, unless we see a shift in broader sentiment. Yen crosses remain susceptible to risk trends as the Asian currency continues to serve as a funding currency and should continue to maintain that role as long as conditions continue to improve in Japan.

Levels to Watch:
-Range Top: 136.00 (Range, Pivot)
-Range Bottom: 131.00 (Range, Pivot)

Suggested Strategy

• Short: Place an entry at 136.25
• Stop: Set the stop to 137.25-100 pips in risk
• Target: The first target is 133.50

Trading Tip – A longer-term descending trend line drawn from the 4/26 high could serve as resistance and lead to a reversal prior to the pair reaching our entry point. If that is the case we would wait for a break below the 20-Day SMA at 133.41 before taking a short position with the range low of 131.00 as a target. The psychological level of 135.00 could also present a barrier to further bullish potential. Therefore with today’s high of 135.01 the expected reversal could already be under way. A lack of upcoming U.K. event risk should leave the pair susceptible to the broader trends and if corporate earnings continue to impress then further upside potential exists keeping the pair on track to meet our entry point.

Event Risk for U.K. and Japan

U.K. – The upcoming economic calendar for the U.K. is tame compared to the past week but markets will be looking for signs that the second quarter growth is sustaining or the risks for a double dip recession are increasing. The consumer confidence reading for July could be a key gauge as increasing pessimism will dim the outlook for future consumption. Mortgage approvals have stalled and a contraction in lending will be viewed as a sign that banks high standards are discouraging borrowers.

Japan – Japanese fundamentals shouldn’t impact direction for the pair but traders will want to watch the consumer price report as deflation remains a concern for the BoJ. The central bank has warned of intervention as yen strength has suppressed prices and weighed on exporters. Therefore, if we see price decelerate we could start to see yen weakness in anticipation of the action from policy makers.