GBPJPY Analysis - Fundamentals Bullish
This weeks fundamentals have had a significant shift and some interesting divergences take place. One of the interesting currencies was GBP, it's now in a particular area for interest as it fights between bullish and bearish economic data releasing.
This week GBP showed a bullish increase in the macro currency strength meter but also in all other long-term indicators too.
We can see from the summary image above that the MCSM, GDP, IR and COTA are all showing bullish signs... but are we too late or will the trend continue?
Currency Strength Meter
The macro currency strength meter is showing potential reversal signs. GBP shown in the solid blue line started May with a strong bullish fundamental value, it started to dip as it reached into late June.
However,, in the past couple weeks the data releasing is suggesting that we may be in for another bullish run...
The dip last week lasted for two consecutive weeks but as new data is released we're showing positive signs for GBP.
JPY had the complete opposite effect, showing a consistently dropped negative value creating a bearish outlook on the JPY.
Overall, we can conclude that as of right now GBPJPY is looking bullish from a purely fundamental view. One factor to note is that JPY has had a weak score for some time and may be due for a retracement.
GDP Differentials Indicator
The GDP Differentials indicator shows further long-term bullish signs for the GBP as the UK it set to outpace the Japan in 2022.
This is a 0.6% increase year on year.
Overall, the GDP differentials are showing bullish signs for GBPJPY moving into 2022.
Trade Analysis (Imports/Exports)
The trade analysis is the only slightly manual process throughout this systematic analysis. The analysis requires dynamic commodities/companies to analyse depending on the country and their exports.
In this case we've analysed 3 major components: BRENT, Gold and Toyota prices.
Overall two out the three analysed correlations came out bullish and one bearish.
Brent is the leading global price benchmark for Atlantic basin crude oils. This includes the oil in which the UK collects and exports around the world. We can see instantly that over the past 5 or so years there's been a positive correlation between GBPJPY and BRENT.
The prices of BRENT took a dip similar to WTI in early march 2020, since then regaining appreciating in price.
This bullish movement was also followed by a bullish move in GBPJPY as you could expect risk assets like BRENT to increase and safe assets like JPY to sell off during a risk on environment.
This is overall bullish for GBPJPY moving into July... however the prices have yet to see any resistance as it comes up to the major levels which saw the dip in March 2020.
GBPJPY has a negative correlation with Gold. The relationship holds true strongly as seen throughout 2013 - 15 as gold prices fell GBPJPY strongly rose.
It's reached an interesting point now where Gold prices have started to congest and stagnate even falling slightly since the peak at 2000.
If this downtrend is to continue with Gold then we may actually see GBPJPY hit highs seen in 2015!
GBPJPY and Toyota have one of the strongest correlations within the analysis. You can see there's a clear positive correlation as Toyota prices increase GBPJPY follows...
However, Toyota prices are now at new highs having smashed the high at 8500 hit in 2014 we're now peaking at 10,000.
If this uptrend is to continue then we can also expect GBPJPY up trend to follow suit.
If the trend starts to reverse then we may actually be in for a bearish downturn.
Interest Rate Differentials indicator
The net interest rate differentials show the money flows of investors.
What we're seeing is that due to the negative interest rates held in Japan that the UK is more attractive for investors to hold their assets currency wise. In the UK they'd be earning a small percentage but in Japan they would not.
This attracts investors in the long-term to invest in the country with higher interest rates in the likes of Bonds or holding the currency for carry trades.
Overall, this is bullish for GBPJPY.
Stock Market Analysis
The FTSE100 is one of the UK's largest stock market indices, combining the growth and performance of the 100 top public companies in the UK.
What we can see straight away is that there's a direct correlation between the FTSE100 priced in JPY and GBPJPY.
Overall, FTSE100(JPY) has had a great run rising to pre-pandemic levels and looking to increase further. This is bullish for GBPJPY but again we're at a pivotal point where inflation targets and other monetary KPIs are starting to catch fire.
If the Bank of England hikes interest rates unexpectedly to curb inflation we may see a slight dip in the stock market.
COTA - COT Report Analysis
Overall, the COT report and more specifically the hedge fund positions are showing positive signs of an upwards move.
The overall net hedge fund open interest has been bullish since early 2021.
This trend has continue as hedge funds continue to buy the GBP and sell the JPY.
The market is saying our bullish idea is with the market and we're not trading against it.
Regarding the price movements on GBPJPY we've seen nothing but bullish movement for the past 6 months... this is something that we've been monitoring and the currency strength meter has highlighted it for the past months.
What we can expect at this point is a potential retrace on the up-trend with a continuation as the supply zone breaks.
This might be a great trade as retail traders will tend to sell at these levels, fundamentals are showing an opposite conviction which creates a contrarian trade idea.