Talking Points:
- An impressive rally has taken place in GBP/JPY over the past week, with the pair now trading at fresh post-Brexit highs.
- While worries of a Japanese ‘stealth taper’ have been soundly faded out of GBP/JPY, the concern now rests with one of risk-reward for forward positioning.
- If you’re looking to improve your trading approach, our Traits of Successful Traders research can help.
GBP/JPY to Fresh Post-Brexit Highs
The past week of price action in GBP/JPY is a good example of how much change can quickly take place in global capital markets. As the Japanese Yen was exhibiting considerable strength last week on the back of concerns around a ‘stealth taper’, we looked into the potential for that theme being an overblown inference. The Bank of Japan has made a noticeable effort of recent to be more open and transparent with markets, and after the bank’s ‘stealth move to negative rates’ in January of 2016, this makes sense.
Shortly after the open of the New Year, GBP/JPY formed a three-bar evening star formation, and that led into last week’s spill. The total sell-off eclipsed 300 pips, but as we wrote, support showing above the psychological level of 150.00 could retain the longer-term bullish structure behind the pair. Over the following couple of days, support set-in, and a morning star formation built, helping to catapult prices to current levels, or fresh 18-month highs in the pair.
GBP/JPY Daily: Evening Star to Morning Star to Fresh 18-Month Highs
Chart prepared by James Stanley
Prior Short-Term Resistance as Support
While traders can now operate with alignment of the longer-term bullish trend with the shorter-term theme of strength, the complication now rests with the prospect of entry. This would be the third approach in GBP/JPY above the 153.40 level, with each of the prior two attempts failing. Also complicating matters is one of risk-outlay. Last week’s morning star set a low at 150.16, which is more than 375 pips away from current prices.
For bullish continuation strategies, traders can zone-in to a prior area of short-term range in the effort of adding bullish exposure. This area showed up after the formation of last week’s morning star, and there were multiple tests of support around 152.00 while short-term resistance was showing from 152.80 up to 153.10. Price pulling back to find support in this area of prior resistance opens the door for bullish continuation strategies, with the possibility of stops lodged below the prior area of support around 152.00.
GBP/JPY Four-Hour: Prior Resistance Area as Potential Staging Ground
Chart prepared by James Stanley
To read more:
Are you looking for longer-term analysis on GBP and/or JPY? Our DailyFX Forecasts for Q1 have a section specifically for each We also offer a plethora of resources on our GBP/JPY page, and traders can stay up with near-term positioning in GBP/USD and USD/JPY via our IG Client Sentiment Indicator.
--- Written by James Stanley, Strategist for DailyFX.com
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