The GBP/JPY pair has been correcting back over the last four weeks but this correction may be ending and the pair could be going higher again.
The weekly chart shows the pair broke above a major trendline at the end of 2016 but then soon afterward started to lose ground.
The pull-back ended up reaching the same trendline which the exchange rate had just broken through before starting to rise again (see price action circled below).
Upside for the pound was generated as a result of Theresa May’s speech on Brexit in which she said that whilst the UK would not be staying in the common market or trying to have a ‘Soft’ Brexit, it would try to agree a free trade deal with the EU after leaving.
Optimism that the UK might be able to agree a free trade deal with the rest of the EU propelled the pound higher in most pairs on Tuesday, Jan 17.
The GBP/JPY daily chart shows the recent correction in more detail and clearly identifies it as a three wave a-b-c correction.
These patterns happen frequently in financial markets and signal a correction in a dominant trend.
The correction normally ends when waves ‘a’ and ‘c’ are roughly the same length.
This appears to be the case on GBP/JPY and strengthens the view that the pair may start to rise again.
The gap down on Monday morning is probably a variety of gap known as an “exhaustion gap” which happens at the end of a trend or move, thus further corroborating the bullish outlook.
The very steep appreciation of the exchange rate on Tuesday is a further sign a bullish reversal is occurring.
The pair will probably move higher from here, with a break above the 140.10 level confirming a continuation up to a probable target at 141.30 just below the 50 and 200-day moving averages and the S1 monthly pivot which form a tough resistance zone at that level.