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Pound signals bullish reversal on strong inflation data

With just two months to go for the planned triggering of the Article 50 by the UK government, talks of hard-Brexit toppled the Pound against the major currencies. The downtrend was accelerated by lower than expected unemployment claims and higher than anticipated retail sales in the US. The Pound was particularly weak against the Yen, which got a boost when the US President-elect called Greenback “too strong”.

The statement pushed the GBP/JPY pair to a low of 136.44. However, optimism returned when the UK Prime Minister Theresa May opined that the UK will emerge from the Brexit negotiations “more united” and “outward looking” than before.

The speech also enabled the GBP/JPY pair to recover to a level of 137.81. We expect the GBP/JPY pair to rise further in the coming days due to the reasons mentioned below.

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During her landmark speech, Theresa May confirmed that she would present the final Brexit deal to both Houses of Parliament. Furthermore, May insisted that she would walk away with no deal rather than accepting a bad deal for Britain. Commenting on her speech, German Foreign Minister Frank-Walter Steinmeier stated that the EU is also looking forward to have a cordial relationship with the UK.

Yesterday, the Office for National Statistics (ONS) announced that the UK’s inflation increased 1.6% on an annualized basis in December 2016. Analysts were expecting an inflation rate of 1.4%. Furthermore, the reported inflation rate is near the Bank of England’s target rate of 2%. Thus, a rise in the inflation rate is considered to be positive for the Pound at this point in time.

A week earlier, the Office for National Statistics (ONS) reported a 1.6% m-o-m increase in the UK’s factory production in November. The market expected only a 0.6% rise in the factory production. The series of positive economic data points to the fact that the UK economy continues to shrug off Brexit related fears.

On the contrary, the Yen had appreciated considerably in the past one month against the Greenback and the Pound. It is a cause of concern for the Bank of Japan. However, the 5.1% m-o-m decline in the core machinery orders in November 2016, reported by the Cabinet Office of Japan on Monday, is expected to weaken the Yen in the days ahead. Analysts were expecting only a decline of 1.3% m-o-m in the core machinery orders. Thus, based on the above details we are anticipating a short-term rally in the GBP JPY pair.

The GBP/JPY pair has bounced off a strong support at 137.20. The rising stochastic oscillator indicates that the currency pair is gaining momentum. So, we can look forward to a bullish reversal in the GBP/JPY pair.

GBP/JPY Pair: January 19th 2017

GBP/JPY Pair: January 19th 2017

A currency trader should wait for the dip and take a long position in the GBP/JPY pair near 138.60. Considering the fragile recovery, a stop loss should be certainly placed near 136.60. If the pair rises as forecasted, then the profit should be booked near 143..

A binary trader can buy a call option to benefit from the probable rise of the GBP/JPY pair. The entry into the trade should be made only when the pair trades below 138.80. The call option or its equivalent (high or above) contract should be valid for a period of at least seven trading days.

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