Yen to resume downtrend on decline in Consumer Prices

Against expectations, the Bank of Japan refrained from introducing another interest rate cut on Thursday. This resulted in a sharp rise of the Yen against the US dollar, the Euro and the British Pound.

However, a close look at the scenario in Japan will reveal that the BoJ cannot take the interest rates further into the negative territory quite easily, as it seems so.

However, due to the reasons explained below, the strengthening of the Yen should be construed as an opportunity to purchase the GBPJPY currency pair near the support levels.

First of all, the BoJ had few options left to weaken the Yen. Taking the interest rates further into the negative territory is certainly not a feasible option. The surprise interest rate cut into the negative territory, announced in January, is largely unpopular among the people and the major financial institutions of Japan. The financial institutions are still ascertaining the way to tackle the previous negative interest rate cut.

Secondly, the market participants know for sure that the BoJ’s attempt to weaken the currency is not working as expected. Thus, a further rate cut would only encourage the traders to speculate in favor of strengthening of the currency.

Bloomberg

Finally, the Japanese economic data showed that the consumer prices declined in March, at the fastest rate in the past three years. Similarly, the household spending also fell at the quickest pace in a year. On a y-o- y basis, the core CPI (Consumer Price Index) declined -0.3% in March. The analysts’ had expected a decline of -0.2%.

Likewise, the household spending in March declined 5.3% compared to a year earlier.

The consensus estimate of analysts is 4.2%.

Even though the BoJ has left the interest rates unchanged, still, the market will see an increase in the liquidity by 300 billion Yen ($2.75 billion) through the loan program announced today for quake hit areas in the Southern Japan. The program will assist the banks operating in the areas hit by the earth quake earlier this month. Thus, it can be understood that BoJ has left the job of weakening of the Yen to the poor economic data and the loan program.

On the other hand, the economic data from Britain continues to remain encouraging. The preliminary GDP growth during the January-March (2016) quarter was 0.4%. The GDP was 2.1% higher compared to the corresponding quarter in 2015. Thus, we can fundamentally expect the GBPJPY currency pair to go up in the days ahead.

The news of BoJ leaving the interest rates unchanged saw the GBPJPY currency pair fall sharply to its major support at 158.12. The MACD main line is still above the zero line and the signal line. Similarly, the momentum is rising. This implies that the GBPJPY currency pair will reverse sharply in the days to come.

Thus, a forex trader should take a long position in the counter. A stop loss can be placed 200 pips below the point of entry. The profit can be booked near the next major resistance at 164.86. Likewise, considering the possibility of a reversal, a binary options trader should purchase a one touch call options contract with a strike price of about 160.

Considering the volatility of the currency pair, an expiry period of two weeks would be sufficient for the currency pair to hit the strike price.

---