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GBP/JPY: Supported at Prior Fibonacci Resistance, But Will it Hold?

GBP/JPY: Supported at Prior Fibonacci Resistance, But Will it Hold?

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Talking Points:

- GBP/JPY ran up to fresh two-month highs to kick off the week, but already prices have retraced a portion of that move after this morning’s disappointing inflation report out of the UK.

- This morning’s move appears as more of a pullback rather than a reversal of the bigger-picture trend; but timing re-entry on the long side be a challenge as this morning’s sell-off has posed a rather quick move down to a key support level. Below, we look at a series of deeper support levels that remain interesting for a continuation of higher-highs and higher-lows in the longer-term theme of strength in the pair.

- Quarterly Forecasts have just been updated, and Q2 forecasts are now available from the DailyFX Trading Guides Page. If you’re 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.

Want to see how retail traders are currently trading GBP/USD? Click here for GBP/USD Sentiment.

GBP/JPY: The Only Constant is Change

The past couple of months have seen quite a bit of change in GBP/JPY, and this was driven by a number of different drivers and various trends. As we came into the year, the pair was riding high on the back of Yen-weakness, which had remained as a dominant theme through most of 2017. Strength had already started to show in the British Pound as markets had driven the currency higher as the Bank of England shifted from an uber-dovish to a cautiously-hawkish outlook; and the prospect of more rate hikes in 2018 kept buyers on the bid.

But that theme of GBP/JPY strength came crashing down in February, as the pair posed a 1,000 pip reversal as global risk aversion began to flare. Global equities began to tilt-lower, safe-havens started to see flows and the Japanese Yen began a bout of strength that lasted for much of the next month. Support eventually showed in GBP/JPY at the 145.00 psychological level as we walked into March.

GBP/JPY Daily Chart: Bullish Trend Reversed in February, Returned in Early-April

gbpjpy daily chart

Chart prepared by James Stanley

After that support set in early-March, prices quickly moved back to the under-side of the post-Brexit trend-line, and then proceeded to spend the bulk of the month resisting there. In early-April, we saw strength return as prices re-engaged above this trend-line, and then continued on to fresh higher-highs and higher-lows.

GBP/JPY Four-Hour Chart: Bulls Back in Early-April as Prices Re-Climb Above Post-Brexit Trend-Line

gbpjpy four hour chart

Chart prepared by James Stanley

Over the past week, that bullish breakout really started to heat up, and prices were soon trading at fresh two-month highs. A bit of resistance began to show last Thursday/Friday, and this comes in at the 76.4% Fibonacci retracement of the February sell-off in the pair, and this comes after the 61.8% retracement of the same study had helped to stall the bullish advance earlier in the month. Prices have now pulled back to find a bit of support at prior Fibonacci resistance.

GBP/JPY Four-Hour Chart: Fibonacci Retracement from February Sell-Off Helping to Set Resistance/Support

gbpjpy four hour chart

Chart prepared by James Stanley

Breakout Pulls Back, Support Starts to Show at Prior Resistance

Earlier this morning brought UK inflation numbers for the month of March, and the report was not pretty for bulls. Inflation came-in below expectations for the second consecutive month of slower price growth, and this makes the backdrop around the BoE a bit less demanding of tighter policy. Nonetheless, markets remain fairly convinced that another rate rise may be on the horizon at the BoE’s Super Thursday event in May; but the bigger question is for the rest of the year: If inflation is already responding to the one rate hike that the BoE did in November, and given another move in May, will inflationary forces remain strong enough to bring on more rate hikes in 2019 or 2020?

At this point, the disappointing inflation print this morning has been enough to elicit a pullback in that prior bullish trend, helping to reverse a portion of the early topside breakout. We’re seeing support show at the 61.8% retracement of the February sell-off, and this is the same area that had previously helped to offer a bit of resistance when prices were on the way up.

GBP/JPY Hourly Chart: Pullback to Support at Prior Fibonacci Resistance

gbpjpy four hour chart

Chart prepared by James Stanley

Moving Forward

Given that we have evidence of support showing at this area of prior resistance, the door can open for topside setups with stops below today’s low. This would, however, need to be taken with the consideration that this would be a short-term reversal setup as the sell-off this morning was rather sharp, and may not yet be over. This would mean that support plays at the current area would be aggressive, and traders would likely want to protect the position with a stop below today’s low and if that doesn’t hold, simply look to re-enter later rather than hanging on for the ride-lower.

A bit deeper is a support level that could be a bit more accommodating, as we have an element of confluence around 151.39. This is the 76.4% retracement of the ‘Brexit move’ in the pair, and this also syncs up with the projection of that post-Brexit trend-line that continued to offer resistance through most of March. And below that we have the 50% marker of the February sell-off at 150.80. A break back-below 150.00 nullifies the bullish trend, and at that point, short-side setups will likely become attractive.

GBP/JPY Hourly Chart: Deeper Support Potential Above 150.00 Psychological Level

gbpjpy hourly chart

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 currency. 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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