Japan’s interest rates remained unchanged at -0.1% last week as the Bank of Japan (BoJ) maintained its ultra-loose monetary policy. The GBPJPY currency pair was subsequently sent skyrocketing, up 3.41% from Friday’s lows to date, as the market favoured the outlook of the higher-yielding Pound.
Japan’s economic fundamentals have somewhat improved this week as consumer confidence and industrial production increased month over month while manufacturing activity exceeded expectations. The slightly enhanced fundamentals, however, have not been sufficient to considerably strengthen the Yen as volumes have decreased and the GBPJPY is trading sideways. Since interest rates are anticipated to be increased by 25 basis points by the Bank of England (BOE) on Thursday, the GBPJPY may move further higher due to the widening interest rate differential between the BoE and BoJ.
The GPBJPY currency pair’s swift move higher on Friday last week formed support at the 176.246 level as the price level was rejected with conviction. However, the move higher stalled near resistance at the 184.008 level. Given that high-impact economic data is expected in England, with the release of the BoE Interest Rate Decision, volumes have declined, and price action has begun moving sideways as traders wait in anticipation.
An interest rate hike by the BoE will likely improve the yielding potential of the Pound, making it more attractive. The 184.008 level will likely materialise, given that traders buy into the higher yielding potential. In contrast, with downside momentum seemingly building up as the GBPJPY trades lower in the early hours of the Wednesday Session, the 23.60% Fibonacci Retracement level at 181.610 will probably be earmarked as a point of interest to the downside.
The BoE’s interest rate decision will likely determine the GBPJPY’s fate for the week. If the market favours the Pound due to the higher interest rates, the 184.008 level will probably play out. Alternatively, the 23.60% Fibonacci Retracement level could provide short-term trading opportunities to the downside if traders back the Yen for its slightly improved economic stature for the past month.
Sources: Cabinet Office Japan, Markit Economics, Ministry of Economy Trade & Industry (METI), Reuters, TradingView
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