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GBP/JPY Technical Analysis: Race to the Bottom

GBP/JPY Technical Analysis: Race to the Bottom

2016-10-12 16:29:00
James Stanley, Strategist
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Talking Points:

  • GBP/JPY Technical Strategy: Longer-term price action still bearish; post-Brexit range saw downside break.
  • With GBP/JPY falling to levels last seen in 2012, traders will likely need to incorporate longer-term analytical observations.
  • If you’re looking for trading ideas, check out our Trading Guides; they’re free and updated for Q4.

In our last article, we looked at a support level in GBP/JPY that had just seen its third test just below the major psychological level of 130.00. And while there was a bit of additional run-higher after that support inflection, the pressure of a potential ‘hard Brexit’ combined with the flash crash in Sterling on Friday of last week created a vigorous break of support; and now GBP/JPY is trading at levels not seen since 2012.

To be sure, the carnage in GBP/USD looks considerably worse as an already weak Sterling is being paired up with a strong US Dollar; but the selling in GBP has been so aggressive that even a weakening-Yen has been unable to offset the increased selling pressure. So, first things first: This is a fairly unique situation in which both representative currencies are seeing some form of weakness as predicated by expectations around each individual Central Bank. We’re not the only ones seeing the risk in such an environment, so this likely means that liquidity will remain low while these issues remain in the spotlight. And that lower level of liquidity can mean even sharper moves in that market. So, while trading GBP/JPY is traditionally volatile, such a condition can make this market even more volatile than usual.

On the short side of the move, the prior points of support could set the stage for resistance moving forward, and there is a confluent zone very nearby that could become very interesting. We pointed out the level of 129.25 in our last article as support, and this could be re-used as resistance for short-side strategies. A bit higher at 130.00 is a major psychological level, and this is just five pips away from the prior swing-low before the big break of support took place. Should price action find resistance at this zone, traders can look at short-side continuation setups provided that they’re comfortable with the risk; and given that the prior swing high was all the way up near 132.50, this could mean as much as a 250-pip stop. If the entry is taken near the 130.00 level, this would mean a run down to 125.00 could offer an approximate 1-to-2 risk-reward ratio.

The long side of the move is going to be a bit more difficult to work with, especially given today’s move of ~225 pips off of support. But the price action swing from the flash crash is very near the low from yesterday; and this all took place within 25 pips of the psychological level at 125.00. Should this support hold, and should today’s gains moderate closer to this level – there could be motivation for reversal plays; but keeping the stop relatively tight will be of upmost importance as a long position would be going very much against the grain of the trend. This scenario would likely need some help from British politics, and basing a trade around such a theme can be a dangerous thing.

GBP/JPY Technical Analysis: Race to the Bottom

Chart prepared by James Stanley

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

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