Talking Points:

- GBP/JPY is attempting to recover from a recent swoon that saw more than 550 pips erased in a short three weeks.

- This brings question to the previously bullish trend, and a bull flag formation has formed as prices have retraced off of those fresh yearly highs.

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GBP/JPY is in an interesting spot. After the deluge in the British Pound on the heels of the Brexit referendum, GBP/JPY sank down to a fresh four-year lows around ¥123.00. Just a year earlier, the pair was testing resistance at ¥196.00. That’s 7,300 pips for those of you counting at home, and this accounted for a whopping drop of -37.2% of the pair’s value: And this is for a non-levered currency pair; not a stock of some small-cap company or a futures contract that’s usually prone to such rampant volatility.

After the flash crash in early-October, a semblance of support began to show in the pair, and after the U.S. Presidential Election in early-November, GBP/JPY ripped-higher as we approached the December rate hike from the Fed. Prices ran-up to the 61.8% retracement of the prior major move (taking the May 2016 high down to the October low), at which point resistance set-in and then held for the next nine months. Recurrent attempts to take out that high in May and again in July fell-short, with lower-highs printing during each instance.

GBP/JPY Daily: 61.8% Fibonacci Resistance Helped to Set the Top for Much of 2017

GBP/JPY Technical Analysis: Bull Flag After Fresh One-Year Highs

Chart prepared by James Stanley

In latter-August, that bullish theme began to show again in the British Pound, and in early-September, we heard the BoE warn that rate hikes might be on the horizon. In quick order, shorts were getting squeezed and prices were running higher towards the ¥150.00 psychological level.

After setting a new one-year high above the 152.50 psychological level, digestion began to show as prices moved-lower, falling below a number of key short-term support levels in the process. While this was happening, a bearish trend-channel formed during the retracement, giving us a bull flag formation in GBP/JPY.

GBP/JPY Four-Hour: Bull Flag in GBP/JPY

GBP/JPY Technical Analysis: Bull Flag After Fresh One-Year Highs

Chart prepared by James Stanley

At this stage, with price attempting to re-cross above that 61.8% Fibonacci retracement while also threatening a top-side break of the bearish channel, long positions can begin to look attractive. However, traders will likely want to remain cautious here, as the rate at which the sell-off in GBP/JPY showed-up suggests that something more than a garden variety pullback may be at work here.

There is a key zone of potential resistance just ahead of the ¥150.00 psychological level, and traders can use this in their forward-looking approaches on the pair. As long as price remains sub-¥150.00, bullish strategies should remain cautious. A top-side break of this level opens the door to continuation plays with eyes on a re-test of the ¥152.50 psychological level. On the bearish side of the pair, traders can look to today’s swing-low at ¥147.71 to open the door for short-side strategies. Short-side targets can be entertained at ¥146.90 and/or ¥146.00 even, as a projected trend-line taken from the initial ignition of the bullish move projects around this area. If we do see a down-side break of that trend-line, the bears are back and deeper targets can be accorded at ¥145.00 and then ¥143.47.

GBP/JPY Technical Analysis: Bull Flag After Fresh One-Year Highs

Chart prepared by James Stanley

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

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