GBP/JPY down on UK GDP miss… but technicals point higher

The pound has weakened only moderately in response to the UK fourth quarter GDP data, which came in slightly below expectations this morning. The UK economy expanded 0.5% last quarter, putting the annual rate at a good 2.7 per cent. The quarter-on-quarter growth however was below the expected reading of 0.6% and also lower than 0.7% recorded in Q3. Growth was led by a 0.8% increase in services and 1.3% in agriculture sectors. But output declined in both the construction and production sectors by 1.8 and 0.1 per cent, respectively. The UK economy has been growing steadily in recent years and unemployment falling. The recent falls in oil prices have caused inflation to fall back which together with a small pickup in wage growth has finally helped to boost real earnings. That said, wage growth still remains very weak and with inflation falling, and growth moderating somewhat, the Bank of England is unlikely to lift interest rates any time soon. This should, in theory anyway, help to keep a lid on the pound and in turn boost exports. The pound is likely to remain weak particularly against currencies where the central bank is relatively more hawkish, such as the USD. However against some of the weaker currencies, such as the euro and yen, sterling may perform. However, even against the USD, the pound has shown some strength in recent days around the key 1.50 psychological handle. In contrast, it has rallied to fresh multi-year highs against the euro. If the pounds’ performance against the euro is anything to go by then it may put on a good showing against the yen going forward. That is because of the similarity of the Bank of Japan’s monetary policy stance with that of the European Central Bank. So far however, the GBP/JPY is not showing much strength. As well as a weaker pound – due to the disappointing UK data – this may also be because a slightly stronger yen. The latter has risen on safe haven flows amid growing concerns over Greece’s future in the Eurozone and also the S&P’s rating downgrade of Russian debt.

As a result, the GBP/JPY currency pair has so far been unable to build on its gains from yesterday when it formed an apparent base around the key technical area of between 175.85 and 176.30 (shaded in blue on the chart). The upper end of this range ties in with the 61.8% Fibonacci retracement level of the upswing from the October 2014 low and the 200-day moving average, while the lower end is the low from mid-January of this year. Yesterday, the currency pair formed a large bullish engulfing candle around this area, clearly suggesting that there was a shift of control from the sellers to the buyers. However, as mentioned, there has been no follow-through in buying so far today, although this could still change later on in the session. If the buyers show their presence here then an initial move towards the key resistance area between 180.70 and 181.05 could be on the cards (shaded in red). This area was formerly support and resistance, and corresponds with the 38.2% Fibonacci retracement level of the downward move from the December high. And if the GBP/JPY breaks through this area then the bulls may then target the 61.8% retracement level of that move at 184.35. However a decisive break below support at 175.85 could pave the way for a larger correction towards the 78.6% Fibonacci retracement at 172.65 or even the October low at 168.00. Meanwhile some of the secondary indicators are also pointing towards a potential bounce: the RSI has formed bullish divergence with price (as it made a higher low) which suggests the bearish momentum may be fading, while the MACD is potentially creating a bullish crossover, albeit below the key “zero” level. Whichever way the GBP/JPY eventually breaks out, there is potential for a sharp move in that direction which therefore opens decent trading opportunities on this pair.