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GBP/JPY Technical Analysis: Stealth Taper Worries Bring 300-Pip Pull-Back

GBP/JPY Technical Analysis: Stealth Taper Worries Bring 300-Pip Pull-Back

2018-01-10 19:30:00
James Stanley, Strategist
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Talking Points:

- GBP/JPY has reversed by more than 300 pips off of the post-Brexit high set on Monday of this week.

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It’s been a peculiar past year for GBP/JPY. Noted for its aggressive nature, GBP/JPY is the pair that currency traders looking for volatility will generally flock towards. And while that volatility can cut in a rather brutal fashion in both directions, at the very least, we knew what to expect. But, over the past year-plus, GBP/JPY has taken on a far different nature, often spending weeks or months slowly moving in one direction or the other; trading more similarly to USD/CHF as opposed to what we’re usually used to seeing from GBP/JPY.

Coming into 2018, the pair had finally started to exhibit some tendencies towards trending. On Monday of this week, a fresh post-Brexit high showed-up in GBP/JPY when the pair touched 153.67. But that new high completed the day as a Doji, and then the fall on the following day gave us a three-candle-sequence that produced an evening star formation. The follow-thru price action this morning has continued that theme as prices in GBP/JPY continue to drop; and the decisiveness with which this move has priced-in harkens back to days of old in GBP/JPY price action.

GBP/JPY Daily: Evening Star Formation Leads to Punishing Follow-Thru

GBP/JPY Daily after Evening Star Formation

Chart prepared by James Stanley

The Likely Culprit – Fears, Prospects, Concerns Around ‘Stealth Taper’

The likely culprit behind this recent reversal pertains to Japanese QQE policy. Concerns began to become evident earlier in the week when the BoJ bought fewer long-dated bonds. This was inferred to indicate that the bank may be looking to scale back on stimulus as growth continues around-the-world; and likely, some parallels are being drawn from what happened in the Euro last year to what may happen with the Yen this year. As growth and stability showed with a bit more prominence throughout Europe last year, the expectation that the ECB would eventually look to exit stimulus kept prices in the Euro running-higher. When the ECB kicked the can on stimulus exit in October, a mere two weeks of weakness showed in the Euro before buyers came right back to the table with focuses shifted towards the new, revised target for European stimulus exit, looking towards September 2018.

My colleague, Tyler Yell, discussed this premise in his article yesterday entitled, Has the Silent BoJ Taper Begun? This is referring to ‘stealth taper’, when the Bank of Japan may utilize the flexibility of their open-ended QE program to actually start slowing bond purchases before making any formal announcements of stimulus exit.

Is this something that’s on the table? Possibly. But, to date, we have no information from the Bank of Japan indicating as such. As a matter of fact, as recently as the December rate decision saw the BoJ carry-forward their commitment to QE. Just a few months before that, we saw our first break of stride when an iteration of dissent showed within the board… but that dissent was from newly-installed BoJ board member Goushi Kataoka, who was actually looking for even more stimulus to get the Japanese economy tilted further towards that 2% inflation target.

So, there is a chance that this recent insertion of weakness is being driven by an overreaction to a subtle inference from earlier in the week.

Bearish Momentum Drives Towards 150.00

While all of the above is good and fine, the fact of the matter is that short-term support hasn’t yet shown in GBP/JPY. Similar to what we looked at in EUR/JPY just a couple hours ago, sellers haven’t even been willing to wait for resistance to form off of prior support. This has been a one-way ride thus far, and looking to buy, at least at this point, might feel akin to trying to catch a falling knife.

GBP/JPY Hourly: Sellers In-Control, Shallow Retracements Indicate Bearish Anticipation

GBP/JPY Hourly: Bears in Control, One Way Show

Chart prepared by James Stanley

The big question, at this point is whether support might show above the 150.00 psychological level. If price action does pose a sustained break below this key level, the prospect of bearish continuation could look considerably more attractive. But, until then, we have the potential for a continuation of that general trend that’s been fairly attractive, biasing towards Yen weakness. We’d see a couple of examples of support around 150.00 in the pair in December, and confirmed support, as indicated by a closed candle on the daily or four-hour chart, can open the door to similar strategies.

GBP/JPY Daily: Aggressive Weakness Fast Approaching Key Whole Number Level of ¥150.00

GBP/JPY Daily: Fast Approaching Key Whole Number Level of 150.00

Chart prepared by James Stanley

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

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