Sterling Talking Points

- JPY continues to rally despite a slowing economy.

- GBP weakness is firmly pinned on Brexit negotiations.

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GBPJPY Not Listening to Central Bank Commentary.

Both Sterling and the Japanese Yen are refusing to listen to their respective central banks, causing the pair to move lower. In the case of GBP, the Bank of England (BoE) recently signaled that UK interest rates are going to move higher this year and probably at a quicker pace than previously expected. Market expectations are now for the BoE to raise interest rates by 0.25% in May and November this year with a possible third hike in Q1 2019.

Brexit negotiations however continue to drive Sterling at the current juncture and may continue to weigh on the currency ahead of important speeches by the UK’s Ministers for Brexit and the EU Council Summit meeting on March 22-23.

In Japan, the economy continues to grow but at a slower pace than expected with headline Q4 GDP up 0.5% against expectations of a 1.0% print. However inflation remains firmly below the BoJ’s target and is currently running at 1% compared to the central bank’s stated aim of around 2%. Lack luster growth and below target inflation will keep monetary policy loose for some time in Japan and push the currency lower.

Our Q1 JPY forecast can be downloaded here and the Weekly JPY Currency Forecast can be accessed here.

Technical Support Levels in View

The latest GBPJPY chart shows the pair moving towards a cluster of supporting candles around 148.000 an area that also contains the 50%Fibonacci retracement level of the August 2017 – February 2018 move at 147.965. The stochastic indicator is also showing the pair in oversold territory suggesting that a reversal of the current move may be on the cards in the short-term. A break higher targets 150.000 ahead of the 100-day EMA at 151.120.

GBPJPY Price Chart Daily Timeframe (August 2017 – February 14, 2018)

GBP JPY Weakness Nears Important Technical Support

Chart by IG

Clients Net-Long of GBPJPY

IG Client Positioning data show 55.0% of traders are net-long GBPJPY with the ratio of traders long to short at 1.22 to 1. The number of traders net-long is 35.9% higher than yesterday and 42.7% higher from last week, while the number of traders net-short is 17.1% lower than yesterday and 11.0% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBPJPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger GBPJPY-bearish contrarian trading bias.

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--- Written by Nick Cawley, Analyst

To contact Nick, email him at nicholas.cawley@ig.com

Follow Nick on Twitter @nickcawley1