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Nikkei Initiates Bullish Sequence Following Failed Run at 200-Day SMA

Nikkei Initiates Bullish Sequence Following Failed Run at 200-Day SMA

David Song, Strategist

Talking Points:

- Nikkei (JPN225) Initiates Bullish Sequence Following Failed Run at 200-Day SMA.

- GBP/USD Outlook Mired by Limited Threat for Above-Target U.K. Inflation.

- Sign Up for the DailyFX Trading Webinarsfor an opportunity to discuss potential trade setups.

DailyFX Table

Ticker

Last

High

Low

Daily Change

Daily Range

JPN225

19725

19835

19602

123

233

The Nikkei pares the sharp decline from the previous week and initiates a bullish sequence as easing tensions between the United States and North Korea bolsters market sentiment.

The JPN225 may stage a larger recovery as it appears to be responding to the upward trend carried over from June-2016, and the broader outlook remains constructive as the Bank of Japan (BoJ) sticks to its Quantitative/Qualitative Easing (QQE) Program with Yield-Curve Control. In turn, the benchmark equity index may exhibit a similar behavior as in April amid the failed attempt to break below the 200-Day SMA (19,314).

However, the recent pickup in risk appetite may largely unravel especially as the Federal Reserve looks to further normalize monetary policy in 2017, and the ‘Great Rotation’ may ultimately trigger a material shift in market behavior as ‘the Committee expects to begin implementing its balance sheet normalization program relatively soon.’

JPN225 Daily Chart

JPN225 Daily Chart

Chart - Created Using Trading View

  • JPN225 may continue to retrace the decline from earlier this month as it fails to test the May-low (19,277), with the index at risk for a larger recovery as it turns around ahead of the 200-Day SMA (19,314) and carves a series of higher highs & low.
  • First hurdle comes in around 19,950 region, the former-support zone, with the next topside hurdle coming in around 20,360 (50% expansion).
  • However, the JPN225 may exhibit a more bearish behavior as the Relative Strength Index (RSI) remains confined by the bearish formation carried over from May, with a break/close below the Fibonacci overlap around 19,280 (23.6% retracement) to 19,330 (23.6% retracement) opening up the next region of interest around 18,600 (61.8% retracement) to 18,710 (38.2% retracement).

Ticker

Last

High

Low

Daily Change (pip)

Daily Range (pip)

GBP/USD

1.2860

1.2970

1.2846

104

124

GBP/USD fails to retain the range carried over from the previous week,with the pair at risk of giving back the advance from the June-low (1.2589) as the U.K. Consumer Price Index (CPI) continues to fall short of market expectations.

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With both the headline and core rate of U.K. inflation holding steady in July, the narrowing threat for above-target inflation may continue to sap the appeal of the British Pound as it encourage the Bank of England (BoE) to carry the record-low interest rate into 2018. The Jobless Claims report may also generate a bearish reaction in GBP/USD as real household earnings remain stagnant, and another batch of weaker-than-expected data prints may foster a 7 to 2 split at the next meeting on September 14 as Sir David Ramsden joins the Monetary Policy Committee (MPC).

In turn, the pound-dollar exchange rate may exhibit a more bearish behavior over the coming months especially as the Federal Open Market Committee (FOMC) appears to be on course to further normalize monetary policy in 2017.

GBP/USD Daily Chart

GBP/USD Daily Chart

Chart - Created Using Trading View

  • Downside targets are on the radar as GBP/USD threatens the upward trend from March, with the pair at risk for further losses as it starts to carve a series of lower highs & lows; keep in mind, the Relative Strength Index (RSI) preserves the bearish formation from May and continues to come off of overbought territory.
  • Need a close below the 1.2860 (61.8% retracement) hurdle to open up the next area of interest around the 1.2800 handle (50% expansion) followed by the Fibonacci overlap around 1.2630 (38.2% expansion) to 1.2680 (50% retracement), which largely lines up with the 200-Day SMA (1.2638).

Retail Sentiment

Retail Sentiment

Track Retail Sentiment with the New Gauge Developed by DailyFX Based on Trader Positioning

  • Retail trader data shows 51.6% of traders are net-long GBP/USD with the ratio of traders long to short at 1.06 to 1. The percentage of traders net-long is now its highest since June 15 when GBP/USD traded near 1.27524. The number of traders net-long is 11.2% higher than yesterday and 17.5% higher from last week, while the number of traders net-short is 9.1% lower than yesterday and 25.1% lower from last week.
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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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