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GBP/JPY Technical Analysis: Top-Side Burst May Have Room to Run

GBP/JPY Technical Analysis: Top-Side Burst May Have Room to Run

2016-07-14 17:05:00
James Stanley, Strategist
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Talking Points:

  • GBP/JPY Technical Strategy: Reversal of prior down-trend now setting new near-term highs. Top-side plays may soon open up.
  • GBP/JPY has seen a reversal in macro themes behind both GBP and JPY, and this could spell an extension in the recent top-side move.
  • If you’re looking for additional trade ideas, check out our Trading Guideand if you’re looking for shorter-term ideas, check out our SSI indicator.

In our last article we looked at the eye of the current Macroeconomic storm in GBP/JPY, as both economies in the pair are going through a significant amount of volatility. And while GBP/JPY is traditionally already a volatile pair as-is, if we combine the themes of risk aversion in the Japanese Yen with the brutal amount of uncertainty facing the U.K. economy around the recent Brexit referendum, there is a recipe for a continuation of extreme, wild and chaotic price action.

This means that traders need to be even more careful than GBP/JPY than usual. Retracements can run a bit deeper, gaps can extend a bit further, and the prospect of picking a swing could be even lower than normal.

The chart is showing divergent themes. On a longer-term formation, the trend still looks bearish as price action remains approximately 2,000 pips below the pre-Brexit swing-high. But on shorter-term variations, the near-term move has been quite strong to the up-side, and this likely has to do with recent developments in the macroeconomic themes for each of these economies. What was previously punishing this pair lower is now helping to guide it higher. After this weekend’s win in Japanese elections, Shinzo Abe’s coalition holds a super-majority in the upper house of parliament, which should give the administration quite a bit of flexibility when launching additional iterations of stimulus and constitutional reforms later in the year. So the two biggest drivers of the GBP/JPY short move have both put in reversals on the week, and price action has followed producing a ~1,200 pip swing-higher.

Price action on the 4-hour chart is in the process of carving out another higher-high after establishing a higher-low yesterday, and given the potential for Yen-weakness to continue as investors factor-in even more stimulus coming out of Japan, this move could have near-term staying power. But as we mentioned earlier, the penchant for volatility in this pair is extremely elevated, so timing of the entry is of the upmost importance.

To look for that next ‘higher-low,’ traders can cast attention to the zone around 139.50-140.00; as 139.50 was the prior swing high and 140.00 functioning as a ‘major psychological level’ in the pair. This could be looked at as a ‘S1’ zone of support, and a bit deeper a secondary zone of potential support could be sought out around the 137.50 psychological level. Should price action fall below 135.48, which is the 76.4% Fibonacci retracement of the major move from 2011-2015, the bullish bias should be re-evaluated as a lower-low printing in the pair could spell further down-side continuation.

GBP/JPY Technical Analysis: Top-Side Burst May Have Room to Run

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

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

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