Greenback remains strong on Q3 GDP growth of 3.1%
On the basis of strong retail sales and inflation data, we had forecast the US dollar to strengthen against the Yen in our October 16 report.
Further, we had also mentioned our plan to open a long position in the USD/JPY pair near 111.70, with a target of 113.70.
Additionally, we had also expressed our interest to set up a binary option trade by investing in a call option valid for a week. As anticipated, the USD/JPY hit our target in a week. So, we closed both trades for a profit. Now, the USD/JPY pair, which closed at about 113.70 last week, is expected to rise further due to reasons given below.
The preliminary third-quarter GDP estimate reported by the US Census Bureau indicate that the US economy continues to expand at a brisk pace. The economy grew 3% on an annualized basis, against analysts’ expectations of a 2.6% growth. The US GDP grew by an upwardly revised 3.1% in the previous quarter. It is the best back-to-back quarters in the past three years. Notably, consumer spending, which accounts for nearly 70% of the US economy, increased 2.4%, after growing at 3.3% in the second quarter.
Despite the negative impact of hurricanes Harvey and Irma, an increase in wage growth by 2.9% in September, from 2.7% in August, has pushed up the prospects of a rate hike in December to over 90%. Further, the US Senate’s approval of the budget blueprint has taken the tax reform a step closer to reality. All these factors favour the continuation of a rally in the US dollar.
In Japan, the leader of the Liberal Democratic Party and Prime Minister Shinzo Abe won the snap election with a thumping majority. Abe’s party, along with a coalition partner, garnered 312 seats out of the 465 total seats contested. The resounding win with a two-third majority will allow Abe to continue implementing his policies of close ties with the US, a hard line on North Korea, and a loose fiscal policy. Obviously, this means that the Bank of Japan would continue to do all that is possible to keep the Yen weak.
Further, the Nikkei of Japan continues to surge new heights. The Yen has a unique inverse correlation with the Japanese stock market and the economy in general. Thus, fundamentally, we can expect the USD/JPY rally to continue in the week ahead. As seen in the image below, the USD/JPY pair is consolidating at 113.50 levels and may end up forming an AB=CD pattern. That would lead the pair to 115.70 levels. Thus, it would be prudent to open a long position in the currency pair.
We are planning to open a long trade in the USD/JPY pair. Further, we prefer to enter near 113.50, with a stop loss order at 112.40. An exit from the trade will be made near 115.70.
Additionally, we may also purchase a call option from a binary broker. The option will be bought when the pair trades near 113.50. A date around November 7th will be chosen for the expiry of the option.
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The uncertainty in the Fed rate hike coupled with mixed economic data kept the Greenback weak against its rivals, including