GBP/JPY Talking Points:
- UK government considering harsher lockdown restrictions similar to March 2020
- GBP/JPY short-term outlook; range possibilities and threat of continued Sterling weakness
- Overwhelmingly short client sentiment leaves the door open for trend continuation
UK Entering a Challenging Few Weeks Ahead
As the UK continues to roll out vaccinations, it is reported that the region is facing the worst weeks of the pandemic according to its chief medical officer. Logistics challenges in the rollout of the vaccine coupled with a new variant of the disease have been said to result in a challenging period in the race to regain some normality before the spring.
Tighter lockdown rules seem likely, which could have a detrimental effect on Sterling crosses. Adding to this, UK GDP for the three months up to November is due on Friday and is forecast at 3.4%, sizably lower than the previous three month period (June to August) of 10.2%
For all market-moving data releases and events see the DailyFX Economic Calendar
GBP/JPY Trading Outlook
The long term uptrend remains intact even though price action has moved lower since creating the recent high around 141.40. The weaker Sterling thus far presents a retracement towards the steeper trendline support and if broken, a further sell-off could see the pair approach the recent low around 139.50.
GBP/JPY: Daily Chart
Chart prepared by Richard Snow, IG
Using multiple time frame analysis - zooming into the 4-hour chart – there appears to be a period of consolidation as price oscillates around 141.38 and 139.50. The 139.50 is significant as past price action approached but did not break below this level of support. The stochastic oscillator has once more entered oversold territory which may interest bullish traders with a potential bounce off the ascending trendline support line.
However, the potential threat of a harsher lockdown in the UK may result in an extended sell-off which could see GBP/JPY trade closer to horizontal support around 139.50.
A bounce off the ascending trendline however, could suggest that the bullish trend is not done yet. Resistance remains at the recent high of 141.40. Subsequent buying would the bring into focus the September high of 142.70.
GBP/JPY: 4-Hour Chart
Chart prepared by Richard Snow, IG
Significant Short Sentiment Opens the Door to the Upside
- EUR/JPY: Retail trader data shows 38.95% of traders are net-long with the ratio of traders short to long at 1.57 to 1.
- We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/JPY prices may continue to rise.
- The number of traders net-long is 10.29% higher than yesterday and 16.25% lower from last week, while the number of traders net-short is 8.81% higher than yesterday and 10.82% higher from last week.
- Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EUR/JPY trading bias.
| Change in | Longs | Shorts | OI |
| Daily | -2% | 2% | 1% |
| Weekly | -13% | -3% | -6% |
--- Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
