Pound turns bullish on better than expected Q2 GDP data

In the past two weeks, the Pound has marginally recovered against most of the major currencies. Even though it may take months, if not years, for the Pound to get back to the pre-Brexit levels, still, the market believes that the Pound’s slide has temporary halted. One of the main reasons for making such an assumption is that the economy of the UK, as discussed below, hardly showed any signs of weakness in spite of the Brexit related issues.

While the Pound got battered last month, the Yen climbed on safe haven appeal. To weaken Yen and restore growth, the Japanese government, under the Prime Minister Shinzo Abe, ordered a fresh stimulus package yesterday. The $265 billion dollar stimulus program (Y28 trillion) was way above the market’s expectation of Y20 trillion stimulus program.

The magnitude of the stimulus program announced by Abe can be understood by the fact that it is equivalent to 6% of the Japanese economy. Up to Y13 trillion is expected to be spent by the central and local governments directly to trigger growth. The amount set aside will also cover loan programs. The announcement puts pressure on the Central bank (Bank of Japan) to match the announcement with similar monetary easing measures. Ultimately, the stimulus package is expected to weaken the Yen considerably in the weeks ahead.

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As mentioned earlier in this article, the UK economy continues to stand tall and strong in spite of the unexpected outcome of the Brexit referendum. While the market was expecting a 0.5% q-o- q GDP growth, the preliminary estimates showed that the UK economy expanded at a pace of 0.6% in the second-quarter. On an annualized basis, the GDP growth of 2.2% is above the analysts forecast of 2%. The lower exchange rate for the Pound now acts as a cushion for any kind of shocks to be faced by the UK’s economy in the post Brexit scenario. Thus, we can expect the Pound to consolidate and even undergo short-term rallies. Considering these developments, we predict the GBP/JPY to remain in an uptrend at least for the next one month.

The declining channel shows that the GBP/JPY has received firm support at 135.90. The stochastic indicator is rising and just out of the bearish zone. The immediate target for the currency pair is at 145.30. The major resistance exists at 151.70.

To capitalize on the opportunity, a currency trader should buy the GBP/JPY pair at the prevailing level of about 138. For capital protection, a stop loss order for the trade should be placed below 135. Partial profit can be booked near 145 levels and the stop loss order can be shifted to the entry price. The rest of the position can be closed at 151.

A binary trader can consider purchasing a ladder call option with a highest target level of 145. Conservative binary option traders can enter a one touch call option trade with a target price of about 142 or lower. Irrespective of the nature of contracts, the expiry date should be in the last week of August.

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