GBP has been the top performer recently, beating all major currencies for the past week and month. On the other hand, we have JPY, which is on the opposite end of the scale, losing to all G7 currencies due to BOJ’s intervention and traders bullish sentiment. Putting them both together, it is not hard to understand why GBP/JPY has been rallying so strongly, gaining the most M/M.
Fundamentally, UK’s economy is looking better, which explains the rallying GBP. Last week’s Q1 GDP data was stronger than expected, coming in at 0.3% versus an anticipated 0.1%, and a delightful turnaround from previous quarter’s -0.3%. Business confidence is also looking up, based on the quarterly Business Confidence Monitor released today. According to the ICAEW, UK’s accounting trade body, UK growth is expected to grow a further 0.6% in Q2, pulling the economy further away from the risk of a “triple dip” recession.
Despite all these good news, Bank of England’s Broadbent believed that the recent 0.3% decrease did not have much significance. This would actually mean good things, as the MPC voting member will most likely be a dove in the upcoming BOE rate decision, potentially providing the recovering economy even more fuel to climb further heights.
Looking at BOE’s current policy rate which is currently at the historical low of 0.5%, it is unlikely that BOE will slash rates further in order to fuel the economy. Instead, a better option may be to expand current stimulus package, which has a smaller deflationary impact on GBP as compared to an outright rate cut. As such, GBP/JPY rally may not be as detrimentally affected, and we could potentially see the positive economic impact pushing GBP higher, resulting in a stronger GBP/JPY provided Yen continue it its quest to seek 100.0 and beyond.
From a technical point of view, the move above 154.5 and beyond last Friday’s high can be construed as a bullish breakout. Stochastic readings are currently pointing higher, making short work of the previous bearish cycle that failed to result in lower prices despite readings pushing below the 80.0 mark. With an interim trough now since formed, we could be on the verge of yet another bullish cycle towards 155.0.
Price on the daily chart remain trading firmly within the Channel, whose top may provide bullish objective for current price action. Stochastic readings continue to remain bullish despite entering deep into the Overbought region, which suggest that price may still be able to test Channel Top, but the ability to break Channel Top is a different story altogether.
With USD/JPY currently seeking to test 100.0, it is highly possible to see GBP/JPY moving higher even without any positive drivers from the UK front. But given the fact that a Triple Top risk remain for USD/JPY, coupled with the fact that long-term GBP/USD has yet to clear 1.56 significant resistance in current bear trend, current long-term bullish outlook for GBP/JPY may face short-term pullbacks, which goes in line with the scenario in which price may bounce lower from Channel top.
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