GBP/JPY Threatens Increased Volatility as the Brexit Plot Thickens
- GBP/JPY continues to digest recent losses, but the prospect of increased volatility is starting to look more likely as tensions in UK politics combined with weakness in the Japanese Yen are producing a tug-of-war like scenario with GBP/JPY.
- While the longer-term back-drop could be open for further weakness in GBP/JPY, the fact that sellers have made such little ground over the past month is noteworthy, and at the very least should be incorporated into directional approaches as GBP/JPY. We look at setups on both sides of the pair below, looking for prices to fill-in before looking to take on exposure.
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The Brexit Plot Thickens Months Away from UK-EU Showdown
It was a climactic weekend for UK politics, and we’re now just months away from the summit with the European Union to decide on a final agreement for the UK divorce from the bloc. That meeting is set for October 18-19, and the proverbial plot has thickened as time draws closer to that looming date on the calendar. As we warned on Friday, a potentially contentious debate amongst PM Theresa May’s cabinet was on the cards for later in the afternoon. We weren’t even really sure what was going to be debated until details started to flow late Friday night/early-Saturday morning; well after trading had closed for the week.
That debate turned out to be even more contentious than anticipated, as we’ve already seen the resignation of two key figures on the Brexit-front with both Brexit Secretary, David Davies, and Foreign Secretary, Boris Johnson, having stepped down. At this point, there are even circulating rumors that we may be headed to a no-confidence vote for PM, Theresa May. This can be accomplished if 15% of MPs from Theresa May’s party write a letter to the Chairman of the Party; and if that threshold is met, all conservative MPs (48 Tory Members of Parliament) will be able to cast a vote for-or-against Ms. May. If she wins – she continues on as PM. But if she loses, she’s barred from participating in the leadership run-off that follows. This would open up the field to a wide swath of potential candidates, and this can change matters significantly considering the late stage of the process that we’re already at for Brexit proceedings.
In the British currency, volatility has been the name of the game after this week’s open. After initially running-higher, largely on the basis of the ‘soft Brexit’ scenario presented from this weekend’s cabinet meeting, prices reversed course as news of Boris Johnson’s resignation made its way through markets. That sell-off hastened a bit as rumors began to circulate that we may be heading for a no-confidence vote, but prices have pulled back since, leaving a number of questions around near-term trajectory in GBP/JPY.
GBP/JPY 30-Minute Price Chart: One Step Forward, Two Steps Back
On a longer-term basis, the backdrop for continued weakness could be justified. But its noteworthy that we’re basically in a digestion formation at this point: Prices broke-below the bullish trend-line that held the lows in the pair for the last nine months of 2017, and even helped to produce a support inflection in February. This bearish break of that bullish trend-line happened in May, and later in June, prices reflected off of the under-side of this trend-line projection. Since then, we haven’t yet seen bears able to push down to fresh lows. We’ve seen both lower-highs and higher-lows, indicating digestion after the earlier-year pick-up in volatility.
GBP/JPY Daily Price Chart
Making directional quandaries even more pronounced is the state of near-term price action. Gains have been slow and steady, while losses have been fast and aggressive. This makes the prospect of building position a bit of a challenge, particularly on a shorter-term basis. For those looking for a bigger move, awaiting a bullish break above the June swing high of 148.12 could open the door to a continuation of higher-highs. This would likely be driven by the dual-impact of cooling tensions around UK politics along with a continuation of ‘risk-on’ in equities helping to drive further Yen-weakness.
On the bearish side of the pair, traders would likely want to let prices fill-in before plotting sell strategies. The 2018 low is more than 370 pips away from current prices, and the higher-low from late-June is approximately 320 pips away; making both of these rather lackluster entry areas for short-side approaches. For those that do want to address the bearish side of GBP/JPY in a more aggressive manner, there are two potential points of interest: 146.07 was a prior swing-low, and bearish breakouts could be sought here down to the 145.00 psychological level. And if the 145.00 level comes back into play, that could also be approached with bearish strategies in mind, looking for targets at the June and May swing lows of 143.75 and 143.20, respectively.
GBP/JPY Four-Hour Price Chart
Chart prepared by James Stanley
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--- Written by James Stanley, Strategist for DailyFX.com
Contact and follow James on Twitter: @JStanleyFX
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.