FX Outlook: GBPJPY is Ready for the Next Pump?

GBP/JPY 4H Chart

Technical Outlook: Favor Technical Pattern 

GBPJPY has been trading sideways for the past few days. Prices are moving in between 184.763 and 184.042, as indicated on the chart. Additionally, after a strong downward movement, prices tend to enter an accumulation phase before resuming an upward trend. The sideways movement of GBPJPY seems reminiscent of such an accumulation phase. 

Fundamental Outlook: Weak PMI, But Hawkish BoE 

The UK is grappling with disappointing PMI figures for August. The services sector is observed to be entering contraction territory, further contributing to the ongoing manufacturing sector recession across the region. The UK economy’s brief period of growth, lasting only six months, has now come to an end as the composite reading drops to its lowest point in 31 months. 

Given the continuous indications of challenges in the business sectors, it’s plausible that BOE officials might opt for caution in their approach to rate hikes, even though inflation remains significantly above the target.

What’s Happening Behind the Scenes? Let’s Examine Some Insightful Data: 

To become a professional trader, relying solely on technical and fundamental data is insufficient for making informed trading decisions. Real market data that operates behind the scenes is also crucial.

DXM: Contradictory Signal from Retail Traders

GBP/JPY Retail traders’ position 

The DXM, or “Dump Money Index,” is a valuable tool for traders aiming to gauge retail participants’ sentiment. It measures the percentage of retail traders holding long or short positions in a specific market. 

As seen, a significant number of retail traders are currently holding short positions (62%). This contrarian signal implies that taking reverse trades might provide advantages. 

It’s worth noting that 95% of retail traders lose money over extended periods. This data indicates that retail traders often misjudge market directions. Therefore, contrarian traders who oppose retail traders’ positions may have a higher chance of success. 

Of course, success isn’t guaranteed with contrarian trading. Nonetheless, it’s a strategy that can enhance your winning prospects.

Seasonality in GBP Futures: Is the Pound Always Bullish in Summer?

GBP Futures’ seasonality 

Seasonality analysis predicts future price movements based on historical data. For GBP, seasonal analysis suggests the pair is likely to maintain a bull market until mid-September 2023. 

However, please note that seasonality doesn’t consider new developments or economic changes; it’s a pattern that can evolve and isn’t infallible.

COT Data: Hedge funds & Leverage funds Favor Pound?

Big players’ GBPJPY position (Left is GBP, right is JPY)

The Commitment of Traders (COT) report, issued weekly by the Commodity Futures Trading Commission (CFTC), provides insight into the positions of large traders like hedge funds and investment banks. 

As shown in the chart, hedge funds are currently accumulating a significant amount of GBP, approximately 75.6k positions. While JPY has approximately 69.9k short positions. This data suggests their bullish outlook on the Pound and bearish outlook on the Yen, providing insights for our long-term decision-making. 

Summary: All Signs Point to a Long GBP/JPY Position

• Technical Analysis: GBPJPY is in an accumulation phase. 

• Fundamental Analysis: Hawkish tone on BoE. 

• DXM: The majority of retail traders are long on the Yen. 

• Seasonality Analysis: Seasonal pattern suggests GBP could remain bullish until mid-September. 

• COT: Huge long on GBP and huge short on JPY. 

Author: Jacky.T

Sources: PMT 

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