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This trade combines two important current themes: the persistent weakness of the Japanese Yen and the strength of the British Pound ahead of the UK General Election. As I explained here, the latest Japanese data have been weaker than expected, suggesting no reduction in monetary stimulus for the foreseeable future.Moreover, as Korean tensions rise, the Yen is losing its “haven” status.
On the other side of the coin, the Pound has been boosted by the large lead for the ruling Conservative Party in the opinion polls ahead of the election on June 8. The most recent, by ICM/The Guardian, puts the Conservatives on 47%, a lead of 19 percentage points over the main opposition Labour Party on 28%. A win by the Conservatives is generally seen as a more friendly result for the markets.
Moreover, the Pound seems immune for the time being to negative Brexit news, even holding its ground despite a German newspaper article quoting European Commission President Jean-Claude Juncker as saying he left Westminster after a meeting last Wednesday with UK Prime Minister Theresa May “10 times more skeptical than I was before”.
The result has been a surge in GBPJPY, which has broken upwards strongly from a downward-sloping channel in place from mid-February to mid-April. It is now trending higher, and that trend looks set to continue for a while yet.
Chart: GBPJPY Daily Timeframe (Late January 2017 to Date)
An obvious target is the high close to 148.50 reached on December 15 last year and, if resistance there were to break, a likely next target would be the 150 round number. On the downside, the lows of 136.55 on January 16 and 135.60 on April 17 provide strong support but it would be wise to place a closer stop at the 140 level.
--- Written by Martin Essex, Analyst and Editor
To contact Martin, email him at martin.essex@ig.com
Follow Martin on Twitter @MartinSEssex
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