GBPJPY returns to grow

In anticipation of the Bank of England meeting, we examine a strategy on the buy of the GBPJPY currency pair.

Contrary to assurances by the central banks of the temporary nature of high inflation which have been stated for the last year, the reality turned to be far different. Growth of prices was sustainable demanding the direction of the world financial regulators to change the approach of their policies towards tightening.

The Bank of England became the first which started the monetary tightening from the G-7 countries. At the last meeting of 16 December, the regulator raised the key rate from 0.1% to 0.25%. With the inflation rate which is above 5% (the last assessment indicates 5,4%), the following increase in the key rate seems inevitable. And the rate increase leads to growth of the pound rate.

By the meeting of 3 February, market expectations have reached consensus on the increase of the rate of the Bank of England from 0.25% to 0.5%.

Now, we turn to the second part of the GBPJPY currency pair: the Japanese Yen.

If the Bank of England has the power to respond to the policy tightening of the world’s central banks, the Bank of Japan can only note that the similar actions are impossible. Since January 2016, the Japanese key rate remains negative (-0.1%), and preconditions for changes in the situation have not been appeared for six years.

The demand for the yen as a safe haven currency is traditionally high during the periods of high volatility. But now the increasing rate of return of US Treasury bonds actively draws attention of investors seeking protection of the risk. And in general, Japan as the country which has the export-oriented economy does not even need a strong national currency.

Macroeconomic statistics also argues in favor of growth of the pound against the yen:

Technically, for the past week, the GBPJPY currency pair has been forming the uptrend. The Relative Strength Index is close to the oversold zone which means a possibility of the significant upward movement without substantial overvaluation of the RSI indicator.

Outcome:

GBPJPY, buy in the range of 155 – 155.2.

Take Profit 1 - 156. The minor part of the position (25-30%) can be indicated with the momentum breakdown of 156.

Take Profit 2 – 157.4. For traders at a high risk, the following partial hold of the position can be considered with the target of growth to 158.2, the maximum of the past year. 

Stop Loss – 154.8. With growth of the price, cautious traders can move the Stop Loss level through the uptrend.