Pound to weaken on widening fiscal deficit

The tables have turned, once again. After rising to a high of 163.87, from a low of 151.63, in a span of two months, the GBPJPY pair has started declining again. While most of the traders and analysts were expecting heightened volatility as the day of referendum comes closer, only a handful of market participants with vast insight would have expected an increase in the support for the ‘Leave’ campaign. Such a scenario has increased the bearish view on the Pound.

Two of the recent polls (YouGov for The Times and ORB International for The Telegraph) conducted among the residents of the UK showed that the support for the “leave” campaign increased to 43%. Only 41% stated that they will vote to stay in the EU. This is a stark contrast from what we saw two weeks earlier when 48% of the respondents supported the “remain” campaign.

The second issue is the trade deficit of UK. The trade deficit widened to £23.7 billion (record level since 2008) in the first quarter of 2016. When the trade deficit widens, the exchange rate of the Pound would fall as there would be a number of importers selling the Pound for their US dollar needs. However, the Pound has held so far. The main reason is the inflow of funds into the property and financial sectors. This balance will break, if UK votes to leave the EU. The investors would play a wait and watch game.

Ultimately, the selling pressure would push the Pound lower against other currency majors.

On the other hand, the Yen continues to strengthen on the safe-haven appeal and the two year postponement of the increase in the sale-tax. Thus, fundamentally, the GBPJPY currency pair can be expected to decline further.

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The main line of the MACD has crossed below the signal and zero line. This indicates bearishness in the GBPJPY currency pair. For the past six months, the GBPJPY pair remained range bound between 155 and 163. However, the MACD was rising. Still, the selling pressure ensured that the resistance at 163 remained unbroken. Now, the weak momentum can easily trigger a steep decline in the GBPJPY pair. This would take the GBPJPY currency pair to a range of 145 to 148.

Thus, considering these possibilities, it would be wise to take a short position in the GBPJPY currency pair at the current level of 155.50. A stop loss order can be placed above 161. The order to book profit can be placed at 148. The trade carries a risk to reward ratio of 1:2.

A conservative binary options trader can consider purchasing a one touch put option contract. On the other hand, a trader with risk appetite can go for a ladder put option contract. The target level for the one touch put option contract can be 150 or higher. On the other hand, the final target level for the ladder put option contract should not be less than 148.50. For both kinds of trade, an expiry in the last week of June is suggested.

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