Pound signals uptrend on lower than expected inflation

A slowdown in the economy and the negative impact of inflation on consumer spending had turned the Pound weak in the past two weeks.

On the contrary, geopolitical tensions between North Korea and the US had increased the demand for safe haven assets such as the Yen, Swiss Franc, and gold.

Reflecting the scenario, the GBP/JPY pair had lost more than 500 pips since August 1st to trade at 141 levels. However, we forecast a reversal in the Pound due to arguments presented below.

The UK Office for National Statistics reported a 2.6% y-o-y increase in the headline consumer price index in July. The figures were unchanged compared to last month, but lower than analysts’ estimates of 2.7%. At the outset, the data doesn’t look good.

However, it should be noted that consumer spending in the UK had declined considerably in the past few months, mainly due to a sharp rise in inflation. Currently, the UK economy is very much driven by domestic demand. So, now a slight drop in inflation would encourage spending, thereby leading to an improvement in the economic activity. Analysts had expected the headline inflation to reach 3%, before start cooling down. Now, it seems that the inflation has peaked earlier than expected. Such a scenario is good for the economy and the Pound as well.

The Office for National Statistics also released the Claimant count change data, which indicated a decrease in the number of people claiming unemployment benefits in July. While analysts’ had forecast an increase of 3,200 people claiming benefits, the actual figures came at -4,200. During the previous month, the number of people claiming unemployment benefits increased by a downwardly revised 3,200. Correspondingly, the unemployment rate declined to 4.4%, from 4.5% in the earlier month. The market had expected an unemployment rate of 4.5%.

The Yen, on the other hand, is losing strength as risk appetite has increased after tensions between North Korea and the US eased on Tuesday. The North Korea state news agency had reported that its leader Kim Jong Un has temporarily suspended the decision to hit the US territory of Guam and is monitoring the situation. Thus, we expect the GBP/JPY pair to rally in the days ahead.

Technically, the currency cross has bounced off the support at 141.30, as shown in the historic price chart below. A reversal is also indicated by the momentum indicator, which is making higher lows. Thus, we can expect the GBP/JPY pair to move towards the next resistance level of 145.20.

We wish to create a long position in the currency pair, near 141.60, to gain from the predicted uptrend. To have a control over losses, we would place a stop loss order below 140.40. We are planning to book profit near 145.

By investing in a high or above contract offered by a binary broker, we can gain from the anticipated rally in the GBP/JPY pair. The contract should be active for a period of one week. Additionally, before entering the trade, we would like to make sure that the GBP/JPY pair is trading near 141.60 in the OTC market.

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