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GBP/JPY Technical Analysis: Reversal Setup Off of Key Psychological Level

GBP/JPY Technical Analysis: Reversal Setup Off of Key Psychological Level

2016-03-02 19:06:00
James Stanley, Strategist
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Talking Points:

  • GBP/JPY Technical Strategy: Flat, short setup available.
  • GBP/JPY remains massively volatile. If you want conservative trade setups, you may be best served in another pairing.
  • GBP/JPY is a pair that retail traders traditionally struggle with in our Traits of Successful Traders research, click here to access the entirety of our research on the topic.

It’s been a volatile few months for GBP/JPY, which is usually the case given the pair’s traditionally erratic nature; but when combined with major macro-economic issues for both represented economies, it’s been like a perfect storm of volatility. On the GBP side, we have the prospects of a Brexit, which, regardless of the way the vote turns, it’s difficult to imagine many positives to be had from the next four months while the topic is widely debated in the media. And on the JPY side, we have the recent move to negative rates which has introduced a brute force of distortion across capital markets. What should’ve led to Yen weakness led to Yen strength, and quite a bit of it. While the Bank of Japan moved as if they were trying to deflect capital flows, it actually appears to have increased risk aversion around-the-world.

But the past three weeks have brought a much needed respite to global markets: Equities have been rebounding, and even the Yen has been giving back some of this new-found strength after the stealth-move by the BoJ to a negative rate policy. With the next BoJ meeting just two weeks away (March 14th/15th), it appears as though traders have begun to factor in some possibility of another move by the Bank of Japan. The Nikkei is up aggressively and when combined with Yen weakness, it appears as though we have some of the same themes from Abe-nomics currently showing in Japanese markets. And when combined with pullback off of those aggressive Sterling moves of the past couple of months, and we have a pullback opportunity setting up in GBP/JPY.

The current level of interest is the 160.00 psychological level that price action resisted off of earlier today. This level had given support just three weeks ago when price action was burning lower, and such ‘rounded’ levels will often offer new resistance at old support in the case of a down-trend.

The difficulty with such an observation is one of timing. Taking the short now is the early, aggressive approach towards hitting the move. Traders can look at placing a stop above today’s high with cushion (don’t put the stop right at the high, as every market maker in the world can see that), which would be approximately 100 pips with current prices. Targets can be cast towards the next psychological level lower at 157.50, and then 156.35, which is the 50% Fibonacci retracement of the secondary move (taking the 2011 low to the 2015 high). If this should become breeched, the next lower psychological level at 155.00 becomes a third profit target.

GBP/JPY Technical Analysis: Reversal Setup Off of Key Psychological Level

Created with Marketscope/Trading Station II; prepared by James Stanley

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

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