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GBP/JPY Technical Analysis: The Big Move Awaits

GBP/JPY Technical Analysis: The Big Move Awaits

2017-03-22 19:17:00
James Stanley, Strategist
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Talking Points:

In our last article, we looked at the continued congestion in GBP/JPY as the next directional move had continued to prove elusive. And a week later, we have little additional information that would indicate that the next directional move is afoot. While the pair was previously driven-lower with weakness around the British Pound from a combination of a) a dovish Bank of England and b) little hope for that changing as long as inflation remained subdued; more recently we’ve had a re-emergence of Yen-strength as risk tolerance has waned after last week’s rate hike from the Federal Reserve.

The net impact of all of this has been even more congestion…

So, rather than dial in on an hourly chart today in the effort of deciphering where this chop may resolve itself - we’re going to go tops-down in the effort of determining intermediate-term strategy in GBP/JPY.

Taken from the ‘Trump Bump’, price action in GBP/JPY is still bullish in nature as we’re above the 50% Fibonacci retracement of the most recent major move on the Daily chart. This level comes in at ¥136.65 – and notice how this level caught the bottom of an aggressive retracement in December and January. After this support level came into-play, the bulls returned and the up-trend around the ‘Trump Bump’ remained alive.

GBP/JPY Technical Analysis: The Big Move Awaits

Chart prepared by James Stanley

After that support inflection came-in, it looked as though bulls were ready to re-take control; and they did, for approximately 800 pips. But that strength couldn’t last long enough to set a new high, as sellers returned to produce a ‘lower-high’ as shown on the 4-hour chart below:

GBP/JPY Technical Analysis: The Big Move Awaits

Chart prepared by James Stanley

So, the net of the two above charts is a bigger picture up-trend with a shorter-term bearish move as a retracement of that up-trend. The complication arises when we look at how supply and demand has shifted as GBP/JPY has traded at or near fresh short-term lows. Frankly, each new low has seen bears dry up while bulls bring price action back. There has been a dearth of bearish directional movement whilst below support; and this makes the under-side of GBP/JPY unattractive for momentum-based strategies.

GBP/JPY Technical Analysis: The Big Move Awaits

Chart prepared by James Stanley

The primary issue with the under-side of GBP/JPY price action at the moment is a lack of seller conviction after new lows have been made. This can be indicative of a ‘bigger’ support level lurking below that sellers don’t want to trigger in-front of for fear of catching a bullish reversal. So the net setup would be a type of a descending wedge with an under-tested area of support. But we can apply the same logic: Using a break below this key long-term support level at 163.65 to open the door for bearish strategies; and a top-side break above the descending trend-line (which is also confluent with swing-high resistance) to open the door for bullish continuation strategies:

GBP/JPY Technical Analysis: The Big Move Awaits

Chart prepared by James Stanley

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

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