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This setup looks to trade on the prospect of risk aversion across global markets. Over the past week, we’ve seen the Dollar begin to show a bit of strength after last week’s NFP report. But this hasn’t been symmetric, as we’ve also seen strength in metals and the Japanese Yen – which would denote that what we’re seeing currently is more of ‘unwind’ of the previous bullish trend in EUR/USD as traders tighten up. We discussed this premise in this morning’s Market Talk, and as for the reasons for this initial indication of risk aversion, we had discussed that yesterday in the article entitled, Yen Bid as Risk-Off Shows After Trump’s Fire and Fury: Is a Larger Correction in Store?

GBP/JPY for Continuation of Risk Aversion

For a continuation of risk aversion, GBP/JPY could be a fairly attractive option. Not only would traders be able to investigate long-Yen exposure, but the British Pound has been weak since last week’s ‘Super Thursday’ at the Bank of England. It appears as though bullish themes will remain subdued in Sterling until more-confirmed evidence of inflation is seen. Of late, data has been ticking lower in the U.K., so we may have some room to work with bearish exposure in GBP.

We discussed the technical setup in GBP/JPY in yesterday’s technical article, and below, we’re looking at the updated setup. Price action is currently supported at the 23.6% retracement of the October-December, 2016 major move. A sustained break below this level would also account for a break below the ascending wedge formation that’s been building in the pair, and this would open the door to short-side exposure.

GBP/JPY Four-Hour: Threatening Down-Side Break of Ascending Wedge, Fib Support

GBP/JPY, EUR/JPY for Continuation/Reversal of Risk Aversion

Chart prepared by James Stanley

On the chart below, we’ve added three support levels that can be used for potential profit targets, as well as three resistance levels that can be used for stop placement once this down-side break takes place.

GBP/JPY Hourly: Support/Resistance Levels Applied

GBP/JPY, EUR/JPY for Continuation/Reversal of Risk Aversion

Chart prepared by James Stanley

EUR/JPY to Fade Risk Aversion

The fact that support levels remain respected is notable. While we’ve seen the initial peek of risk aversion, we haven’t yet seen sellers completely take-over just yet. While price action hangs on the proverbial thread in GBP/JPY, the setup in EUR/JPY looks stronger, and given the theme of Euro strength on the back of improving growth and inflation in the bloc, this could be a counter-setup to short-side GBP/JPY. We discussed this setup in yesterday’s technical article entitled, EUR/JPY Technical Analysis: Buyers Respond to Fibonacci Support.

EUR/JPY remains supported at a key level that held the lows in the pair through a large portion of July. This level at 128.52 is the 38.2% retracement of the ‘Abe-nomics’ move in the pair, and at least at this point, buyers have been able to hold prices above this level. This can open the door to bullish exposure, and on the chart below, we’ve added three resistance levels for potential targets as well as three support levels that can be investigated for risk management or stop placement.

EUR/JPY Four-Hour: EUR/JPY Remains Supported, Support/Resistance Applied

GBP/JPY, EUR/JPY for Continuation/Reversal of Risk Aversion

Chart prepared by James Stanley

--- Written by James Stanley, Strategist for DailyFX.com

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