GBP/JPY Range Looks to U.K. Fundamentals for Direction
The pound’s three day rally against the yen ended as the pair violently reversed on the back of a broader flight to safety. A sharp fall in U.S. consumer confidence fueled building risk aversion leading to across the board yen gains. Improving British fundamentals and signs that the European debt crisis may be in the rearview mirror had been generating sterling support. Indeed, the number of British workers claiming government jobless benefits declined for the fifth consecutive month in June adding to the case for sustainable growth despite new austerity measures. Meanwhile, successful bond auctions from Greece and Spain proved they have the ability to raise funds on their own easing concerns that the debt crisis will become a broader contagion spreading to the U.K. Nevertheless, the agreement for a double dip global recession has started to gather steam and could limit any bullish sentiment for the pair. Yet, strong corporate earnings and a clean bill of health for the European banking system following the stress test could restore sterling support keeping the current range intact.
Levels to Watch:
-Range Top: 136.00 (Range, Pivot)
-Range Bottom: 131.00 (Range, Pivot)
• Long: Place an entry at 131.00-Range Bottom
• Stop: Set the stop to 130.00-100 pips in risk
• Target: The first target is 20-Day SMA at 133.75
Trading Tip – Although we have defined the lower bound of the range at 131.00 we can’t discount the 132.00 handle as a potential pivot level as the pair has failed to close below it since May 28th. If that is the case again today, a long opportunity may come ahead of our entry. Given the conviction of recent bearish sentiment we still favor our original target, but will remain cautious given the broader trend as potential exists for a break from the range. The European bank stress test results will be revealed on July 23rd and could potentially have a significant impact on sterling direction and the broader market. Therefore, those not already in positions may want to sit on the sidelines until the post release volatility settles to gauge future direction. The level of event risk on tap from U.K. fundamentals and corporate earnings could see the range deliver several opportunities to profit if the lead to shifts in sentiment.
Event Risk for U.K. and Japan
U.K.– The upcoming economic calendar is full of event risk for the pound starting with the Public sector net borrowing report which is expected to show the deficit in June was 13 billion compared to May’s 16 billion. A shrinking deficit may raise the outlook for a rate hike with inflation above the central bank’s 3.0% threshold. The release of the minutes from the MPC’s last meeting could add to an improved outlook for yields if there was a break of ranks with members voting for tightening to begin. The June retail sales report and the reading for second quarter GDP are forecasted to show sustained domestic demand and growth which would continue the theme of strong U.K. fundamentals and could restore bullish sterling sentiment.
Japan – The all industry activity report for May is the only Japanese fundamental release with any market moving potential. The broader measure of the economy could reinforce the BoJ’s improved outlook for growth which could generate short-term yen support. Otherwise, look for broader trends to dictate the Asian currency’s price action with the corporate earnings calendar presenting significant event risk.
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