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GBPJPY Analysis (Sept, 2021) Interest Hike Coming?!

The United Kingdom has relieved itself from the cages of lockdown for the past few months. Businesses have been able to open but with the thought in mind to be mindful of social distancing where possible and keep clean.

The Bank of England has mentioned that "tightening of monetary policy may be necessary" which suggests that inflation may be spiralling out of control as prices rises and shortage of workers continue due to Brexit and Covid-19 related issues.

Tightening monetary policy may consist of increasing interest rates which means a hawkish stance. This is bullish on the base currency of whichever monetary authority made the decision e.g. if the Bank of England increased interest rates this would be bullish on GBP.

Logikfx Technology Summary

The Logikfx technology summary page is currently showing an interesting change in data for GBPJPY, there's potentially an early economic sign of a bullish GBPJPY run coming soon. Could this be due to the impending monetary reaction to maintain inflation at a sustainable rate.

Overall, what we've identified is the following indicators are bullish:

The macro currency strength meter that we will go into detail below has shown a neutral/ bearish bias so far but with early signs of bulls.

Macro Currency Strength Meter

The macro currency strength meter is currently suggesting a few things:

  • GBP the base currency is starting to strengthen and become bullish after increasing over the past 2 weeks.

  • The JPY currency on the quote side has had bearish data releases suggesting it's becoming weaker.

  • Currently, both the GBP and JPY fundamental strength seems to be negative but in favour of GBP as it's rising which means a potential future bullish move on GBPJPY.

GDP Differentials

The GDP differential indicator shows that the UK has a bullish GDP growth rate forecast, much higher than Japan. The chart shows that UK is expected to grow at least 5% by 2022 in comparison to Japan's 3% expected growth rates.

This is bullish in favour of GBPJPY.

Trade Analysis (Imports/ Exports)

The trade analysis we've included a mixture of commodities and a Japanese company. One of the commodities considered was Gold. One of the reasons is the UK holds and imports large quantities of Gold. The other reason is that Gold is a safe haven asset similar to how the JPY is a safe haven currency.

In this case GBPJPY has a negative correlation against Gold prices which makes sense because JPY is the quote currency.

The recent dip in Gold prices suggest that GBPJPY may actually continue its bullish run that we saw over the past year.

This overall agrees with the technology summary mentioned earlier.

BRENT oil prices is another commodity that I've considered, in this case we can see an interesting correlation. The analysis found a 29% positive correlation which shows 29% of the time oil prices rise GBPJPY follows and vice versa.

What we're seeing in this case is BRENT prices rising slightly which goes against the bullish bias earlier.

Toyota is the final company within the analysis, straight away we can see there's a strong positive correlation. The price charts are near identical in movements, as Toyota prices rise GBPJPY prices rise too.

Here we can see Toyota prices make a bullish push but GBPJPY prices falling.

This discrepancy may be an indicator that GBPJPY could be lagging behind and may be in for a bullish move very soon assuming Toyota prices continue to rise.

Overall, 2/3 of our companies and commodities analysed suggest a bullish move is imminent.

Interest Rate Differentials

Overall, the interest rate differentials are showing one thing.

The UK interest rates are higher than Japan's interest rates which means investors may prefer to hold British- assets in GBP as there's more interest to be earned on the currency.

There is also a debate in the Bank of England whether to use the monetary lever and increase interest rates to curb inflation getting out of control.

This increase in interest rates would be bullish for GBP but would actually tighten the UK economy and make lending more expensive.

Stock Market Analysis

The FTSE100 is the major stock market index which is a barometer of the UK's economic health. It tracks the performance of the top 100 companies in the UK. What we've seen is that the markets took a huge dip in March 2020 but now recovered in price.

The prices have now started to slightly dip, however it's bullish run has shown to be positively correlated to GBPJPY.

In this case the stock market analysis is actually slightly bearish.

COTA - Hedge Fund Positions

The hedge fund positioning on the COTA tool is showing a huge bullish signal. What it's showing is that the hedge fund open interest has shifted from bearish to bullish. This means hedge funds are overall buying the GBP and selling the JPY.

This is a great confirmation sign of a bullish move as it suggests we'd be trading with the market and not against it on a bullish move.

Price Trends

The price trends on GBPJPY have been bullish pretty much all year. There's recently been some price resistance which may see buyers come back in after a correction.

The redlines marked show possible areas buyers could come in so keep an eye out on any technical confirmations.

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