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JPY 1Q Forecasts: Range USD/JPY 7-Year Wedge, Bullish GBP/JPY Post-Brexit Break

JPY 1Q Forecasts: Range USD/JPY 7-Year Wedge, Bullish GBP/JPY Post-Brexit Break

2021-01-02 18:00:00
John Kicklighter, Chief Strategist

JPY 1Q Forecasts: Range USD/JPY 7-Year Wedge, Bullish GBP/JPY Post-Brexit Break

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Whether for the intention of mere analysis or on the hunt for opportunities, there is a tendency among traders looking beyond their normal time frames to seek out setups that pose a dramatic departure from the norms they are experiencing. Most often, this manifests as a hunt for candidates of extraordinary volatility that can feed a breakout and evolve into a systemic trend. Naturally, entering an abrupt and prolific move right at the beginning of its charge would be appealing. Yet in practice, that is an improbable scenario. With a keen appreciation that I don’t know the future, I like to look for opportunities that can perform in prevailing conditions. Further, setups that can perform in as many alternative scenarios as possible while also offering robust technicals and a profound fundamental backdrop are well rounded. Looking into 2021, I’m interested in the gravity of USD/JPY’s range and the contrast for multiple scenarios to a GBP/JPY climb.

Chart of USD/JPY (Weekly)

USD/JPY Weekly Chart IG 2010 2020

Chart prepared by John Kicklighter, created with IG

Eventually, USD/JPY will clear the incredible range it has carved out stretching back to 2014. Yet, as mature as this pattern may be on the technical side, the fundamental aspects to this cross look particularly adept at tripping up attempts to force a clear drive. Historically, there is a speculative relationship between these two currencies but with global yields crushed and unlikely to recovery for a few years, there is at present little haven or carry advantage between them. That is likely to reinforce the weight behind the 110 to 102 range. I will look for swings in these bounds.

Chart of GBP/JPY (Weekly)

GBP/JPY Weekly Chart IG 1995 2020

Chart prepared by John Kicklighter, created with IG

Where USD/JPY fundamentals are likely to render indecision in most of the probable scenarios I can process, there is a lurking and inherent bias in the different paths I see for GBP/JPY. In the event of a sustained ‘risk on’ climb, a break of an equally-coiled range could forge a sustained run above 140 resistance. Risk aversion could lead to a pullback but 117 is the pair’s historical and 122 a multi-decade trough so the burden of a further fall escalates quickly. The big lift factor is with the Pound. A clear EU-UK trade relation will come Jan 1. It is certainly possible for further disappointment to deflate the Sterling, but I see little further premium to discount and relief ahead.

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