GBP/JPY: pound gets its mojo back

The pound has got its mojo back thanks to some solid UK economic data.

The construction PMI improved to 55.9 in May from 54.2 previously, easily beating the expected reading of 55.1. On top of this, the latest lending data showed a few positive surprises too. The number of mortgages taken out by individuals rose to more than 68,000 in April, which was not only better than 64,000 expected but was the highest since last February. Meanwhile, the value of mortgages was £1.9 billion in April compared to £1.8bn in March – the largest amount since November. Overall net lending to individuals totalled £2.9 billion in April versus £2.3bn expected.

Though the gains have so far been far from spectacular – with the GBP/USD so far only rising about 70 pips off its low – things could change dramatically as we progress thorough the session and the week as more sellers potentially square their positions and/or fresh buyers came into play – particularly if the key services sector PMI tops expectations on Wednesday (it is seen at 59.2 versus 59.5 in April).

Because of the dollar’s on-going rally, sterling’s underlying strength may not be plainly evident when looking at the GBP/USD currency pair. But against some of the weaker currencies, such as the JPY, the GBP does look strong. Indeed it is the GBP/JPY that we are focusing on (again) today as it tests that key 190 handle. Will it finally break higher?

The GBP/JPY rally had stalled around the 189.70/190.00 area for a number of days recently, but the cross finally appears to be on the verge of a breakout. Price action looks decidedly bullish with the daily chart for example showing two hammer candles in as many days and prior resistance at 188.55 turning into support. If today’s UK data continues to underpin the GBP then the bulls may finally witness the breakout in the GBP/JPY that they have patiently been waiting for. A decisive break above 190.00 could target levels not seen since the financial crisis. The immediate bullish targets could be the Fibonacci extension levels shown on the chart. These include the 161.8% extension level – at just shy of 191.30 – of the last downswing we saw from point C which concluded at point D. The extension levels of the last significant downswing from point A to B come in at 193.55 (127.2%) and 198.45 (161.8%). In between the Fibonacci levels is the projected target of the double bottom pattern around 194.50. This is derived from adding the height of the pattern (i.e. 950 pips – the distance between point C and D) to the neckline at 185.00.

Although a breakout looks imminent, traders should not (or never) forget their risk management strategies as price could turn back lower at any time and without any reason (all it takes is one massive sell order or some unexpected economic announcement). It is also worth noting that the momentum indicator RSI is at overbought levels (of >70) after 7 consecutive weeks of gains. As things stand though, only a decisive break below support at 188.55 would invalidate this bullish setup. This appears less likely than for price to rally, for the reasons stated above.