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Talking Points:
- GBP/JPY Technical Strategy: Pending Short
- British Pound Strength throughout the week offers a threat to the short-thesis in GBP/JPY.
- The Spinning Top formation on Friday highlights indecision, and could serve as a prelude for a short-entry early next week.
A strong week of trading has seen the British Pound strengthen against the Japanese Yen by over 550 pips as risk aversion yielded ahead of a pivotal FOMC decision next Thursday. This puts GBP/JPY in the uncomfortable position of offering a short-term bullish posture with an intermediate-term bearish posture; which will likely be decided by Central Banks from both economies as the Bank of England looks at a rate hike early next year, while markets have begun pricing in the potential for another round of Quantitative Easing from the Bank of Japan.
GBP/JPY has become one of the more volatile risk-trades in the world as impact from a Chinese slowdown continues to seep into the global economy. Japan is particularly vulnerable given their robust trading relationship with their Chinese neighbors, and should risk-aversion come back into markets, long Yen is one of the more attractive areas to be positioned around. The pair moved down by nearly 1,500 pips as panic swept through global financial markets, so this 550 pip retracement throughout the week is but a mere drop in the bigger-picture bucket.
Near-term resistance at 186.27 is especially attractive, as this is the 38.2% Fibonacci retracement of the most recent major move, and this price level capped yesterday’s rally. Prices were unable to breakthrough in a soft day of trading on Friday, further highlighting this level as a potential level of resistance for stop placement should short positions become activated. Should prices move below 185.50, short setups could become more attractive with stops placed above this 186.27 and targets cast towards the confluent Fibonacci support level of 184.00.
