The GBP/JPY pair fell to a 2-month low today after the data in the UK showed CPI in December at 0.5% year-on-year, which is well below the estimate of 0.7% and down from the November’s print of 1.0%.
The cable weakened to a three-day low of 1.5076 following the weak data, although losses have been recovered since the Gilt yields in the UK recovered post the release of the data.
The 10-yr Gilt yield in the UK fell to a 28-month low yesterday after breaching 1.610% support, a level last seen in May 2013.
The yields declined as the markets began pricing-in the weak CPI data - expected to come-in at 0.6% year-on-year – well in advance
Thus, post data release, yields recovered from the low of 1.506% to trade at 1.549%. Moreover, yields recovered despite CPI printing at 0.5%.
The uptick in Core inflation may help yields extend recovery to 1.61%.
The equity markets in the Europe are showing signs of stabilization today, with the German Dax trading 0.935 higher, while the London’s Ftse trading 0.54% higher.
On similar lines, the US index futures are trading in the green. The S&P futures are up 0.40% at the time of writing.
Meanwhile, the 10-yr yield in the US fell to Oct 2014 low of 1.864%, before recovering slightly to trade at 1.88%. Given the positive action in the US index futures, the likelihood of 10-yr yield closing above 1.864%is high. This will open doors for a technical correction to 1.95%.
Despite the slump in the Treasury yields, the USD/JPY pair has seen renewed buying pressure in the last three trading sessions, each time it dipped to 118.00 levels. Similar action was seen today as the pair recovered from the low of 117.72 to trade at the current level of 118.53.
Thus, the Yen is likely to weaken even on slight gains in the equities and Treasury yields.
GBP/JPY - to test 180.90 before further sell-off resume
The recovery in the UK Gilt yields, along with relative weakness in the Yen on recovery in Treasury yields is likely to support gains in the GBP/JPY pair.
Technically, the GBT/JPY pair is oversold on daily charts as indicated by the RSI. Plus a technical buying is likely to set-in since the pair has recovered after dipping below the support at 178.70.
We can also see a positive price-RSI divergence on the 4-hour chart
Thus, the pair is likely to test 180.90 (100-DMA) levels before resuming further sell-off.
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