GBP/JPY – Failure to rise above 190.00 could trigger a correction to 186.44

The GBP/JPY pair clocked a high of 190.00 last week, before falling back to 187.78 levels. Fresh bids were seen today, which pushed the pair to a high of 189.56.

The pair has rallied from the low of 174.86 (seen in Mid-April) to a high of 189.95 without a meaningful correction. The major part of the rally was due to the sharp rise in the GBP/USD pair from the low of 1.4564 to 1.5813. Moreover, the British Pound contradicted the widespread expectation of pre-election and post-election weakness.

Meanwhile, the latest rise in the GBP/JPY cross has been triggered by a rise in the USD/JPY pair over and above 122.00 levels.

Ahead in the week, the fate of the GBP/JPY cross is dependent on the UK first quarter GDP report due on Thursday, followed by the US first quarter GDP report on Friday.

Pound could rise ahead of Thursday’s preliminary Q1 UK GDP

The UK first quarter GDP is expected to be revised higher to 2.5% year-on-year from 2.4%. On similar lines, Quarter-on-quarter GDP is expected to be revised higher to 0.4% from 0.3%. An upward revision of the UK GDP is likely to lend support to the British Pound. We may very well see the GBP being bid higher ahead of the report on Thursday.

US GDP could be a non-event

On the other hand, the US first quarter GDP is likely to be revised lower to -0.9% from the previous estimate of 0.2%. However, the Friday’s strong core CPI numbers and an upbeat US core durable goods number are likely to overshadow Friday’s US GDP report. Moreover, by now, it is well-known fact that US economy slowed down considerably in the first quarter. Thus, we may not see much reaction in the FX markets, until and unless the actual print is significantly higher/lower than the consensus estimates.

Greek issue could help strengthen JPY and weaken GBP

An EU official was quoted saying today that no deal is likely to be reached between Greece and its international creditors by this Thursday. The official said Grece’s VAT proposal was not good enough and that no deal is expected by Thursday's teleconference with deputy finance ministers. Greece is due to make a payment to the IMF on June 5th and we have repeatedly heard Greek government complaining about the shortage of funds and increasing possibility of a default.

So far, the financial markets have been complacent. However, the German 10-year is showing signs of weakness today, indicating a rise in demand for safe haven German bunds. In case the Greece issue flares up, a further sell-off in the EUR/USD would also drag the GBP/USD pair lower. Meanwhile, funding currency like the Japanese Yen may gain on risk aversion.

GBP/JPY: Could test 23.6% Fib retracement at 186.44

• As said earlier, the British Pound may rally in anticipation of an upward revision of the first quarter GDP. In case, the pair fails to break above 190.00 on a daily closing basis, a renewed selling pressure could push the pair back to 187.78.

• The said level would also act at as neckline for the double top formation in case the pair reverses from 190.00. Thus, a break below 187.78 would shift risk in favor a fall to 186.44 (23.6% Fib R of 174.86-190.00)

• A spinning top candle for the previous week indicates the bulls may be losing interest and we may have a reversal on the cards.

• Overall, Fresh sell-off could be expected anywhere between 189.50-190.00 levels for the downside target of 187.78 and 186.44 with stop orders seen above 190.00 levels.

• However, a daily close above 190.00 could bring in fresh bids that may push the pair higher to 192.00 levels.