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GBP/JPY Technical Analysis: Testing Post-Brexit Highs Ahead of the BoJ

GBP/JPY Technical Analysis: Testing Post-Brexit Highs Ahead of the BoJ

2018-01-22 15:10:00
James Stanley, Strategist
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Talking Points:

- GBP/JPY is testing a batch of resistance we looked at last week.

- Bulls have returned to GBP/JPY, but with a Bank of Japan rate decision on the docket for later, will they be able to punch up to fresh highs?

- Are you looking to improve your trading approach? Check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

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GBP/JPY Testing Post-Brexit Highs

GBP/JPY continues to trade near post-Brexit highs as we approach the Bank of Japan’s first interest rate decision of 2018, on the calendar for tomorrow (Monday night in the U.S.). Coming into the year, price action in the pair remained strong as the Brexit recovery in 2017 was underway; but in that first week of the New Year, worry began to build that the Bank of Japan might be making the initial steps towards tapering QE purchases. When the BoJ bought fewer long-dated bonds as part of their open market operations, traders began to infer that this may be a first step towards a stronger removal of stimulus; which came to be known as a ‘stealth taper’ of QE.

As we wrote, this was likely an overreaction given that the BoJ had offered no such signals towards looking to end stimulus. While core inflation remained on a steady track of growth throughout last year, Novembers .9% Core CPI read is still well-below the BoJ’s 2% target. The country’s struggle with inflation has been so pronounced that we even have dissent within the bank from those looking for even more QE. So, it doesn’t appear likely that this is yet an issue for the BoJ. Within short order, bulls had returned to GBP/JPY to prod the pair-higher, and just a week later we had fresh post-Brexit highs in GBP/JPY.

GBP/JPY Four-Hour Chart: Recovery from ‘Stealth Taper’ Pull Back

GBP/JPY Four-Hour Chart, Recovery from Pullback

Chart prepared by James Stanley

GBP/JPY Remains Near Highs Ahead of BoJ

Last week we looked at GBP/JPY trading around current levels, warning that structure wasn’t yet supportive of bullish continuation scenarios. Prices pulled back after that article, finding a bit of short-term support around a prior swing-high at 153.10, and price action has since re-ascended right back towards that group of prior resistance around 154.25.

At this stage, chasing the move ahead of a major Central Bank rate decision could be a challenging way of looking to join the bullish trend. Instead, traders can go into tonight’s rate decision looking for some element of a pullback that could allow for bullish continuation. The key here will be confirming that support is in-fact showing as support, as buying a falling knife can be dangerous should the BoJ signal that tapering stimulus might be on the horizon.

There are two near-term support areas of relevance, around that prior swing-low that syncs up with a previous swing-high at 153.10; and below that, we have a collection of supports around 152.00. Should price action pull back to find buyers at either of these levels, the door remains open for top-side continuation in GBP/JPY.

GBP/JPY Hourly Chart: Near-Term Support and Resistance Applied

GBP/JPY Hourly Chart with Near-Term Support and Resistance Applied

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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Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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