A tidal wave of selling has pummeled the GBP/JPY pair through this week, as short term optimism smiled on the Yen while mounting concerns weighed on Sterling.
Pound /Yen has long been a favorite of short term day traders due to volatile and intense price action, and this week has provided a dramatic example of that. The pair is racing to carve new lows for 2018 amidst a sharp fall recently.
We have long felt there was underlying weakness in the Pound, primarily due to flagging growth in the UK economy. The latest confirmation of that was this weeks CPI and GDP reports, both of which were well under expectations, and indicated a profound slow down the the British economy.
Across the globe, the Yen has benefitted from risk aversion during the middle to later frames this week, and has consequently strengthened more broadly. With a re-escalation of hawkish talk on trade coming out of the United States and the collapse of a possible summit between the US and North Korea, the haven status of the Yen has come back in vogue.
Against a anemic pound sterling, and with the normally volatile moves of the Pound/Yen pair as a backdrop, the Yen has wildly over performed.
While there will surely be mildly corrective bounces, we expect the shape of price action for this pair to extend downward. For more resources and insight on how to trade this market and other markets with binary options, I highly recommend this upcoming webinar
The challenges facing the Pound and the entire UK economy, are seemingly coming from all corners.
There is Brexit ambiguity, disappointing export numbers, and a lack of enthusiasm in the consumer base.
Layered on top of those more objective indicators, is a newer issue regarding cratering expectations in markets. It was just last fall when the Bank of England hiked interest rates and was sending a message that they were resuming a path to monetary normalization. Our concern at the time was that this optimism was ill founded, as it seemed to be merely the result of a dramatically devalued Pound, which had suffered a sharp fall after the Brexit vote. The suddenly cheaper Pound fueled a short lived improvement in economic indicators as trade and consumer spending was buoyed by the dynamic.
Now that a lower valuation on the Pound has been fully baked in for a year, and there is no meaningful organic growth happening, the optimism of last fall looks to have been badly misplaced.
As the data from the US and Japan has been stable and improving, the situation in Great Britain looks worse and worse by comparison.
Of particular interest to short term binary options traders is next weeks calendar. With a data heavy week for the dollar, and event and news risk that could increase desire for the Yen as a safe haven, it could be another brutal week for the Pound by comparison.
Trading Idea for Next Week
With a base case being the expectation for a continuation of Pound weakness, there could be several options for short term traders to consider a position in Pound/Yen.
While Pound/Dollar could be an attractive option as well, there is significant news flow, data and event risk with the Dollar next week. On next weeks economic calendar for USD we have the Consumer Confidence Index, GDP, core PCE and Non-farm payrolls all being reported. If there are downside surprises in any of those for the greenback, it could neutralize a potential downside move in GDP/USD.
With the average true range indicator spiking this week in the GBP/JPY pair, wider swings are possible than normal for this highly volatile pairing.
chart built by Jason Pfaff in TradingView
A meaningful level of support is around the 145.155 level, based on the lows of early March. If that level is tested and fails, which could happen on Friday, the next level of support is not until 141.447.
If that price action plays out to the down side, there could be several opportunities for traders looking to gain exposure to the volatility of this pair with the capped risk products offered on Nadex. If you have not already done so, you can register for a free and permanent practice account with Nadex at https://www.nadex.com/demo