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- GBP/JPY is pulling back at the start of the new week
- But breakout from bullish wedge pattern remains valid
- Could still bode bullish longer-term
The GBP/JPY exchange rate has broken out above the upper border of a falling wedge pattern and is expected to extend substantially higher.
Short-term weakness at the start of the new trading week is therefore expected to be temporary. Markets are in 'risk-off' mode and showing a demand for the safety of the Yen while Sterling is seen softer right across the board following the strong performance in the previous week.
This may just represent a bout of profit-taking or short-term noise rather than a major reversal and we continue to be bullish seeing a strong chance the uptrend will resume.
A break above the 149.74 highs would provide confirmation of a continuation higher to a conservative target at 153.80.
The 153.80 target is calculated using the height of the wedge (x) as a guide, and extrapolating it by 61.8% from the breakout point (y), for a conservative upside estimate. This is the accepted method amongst market technicians.
There is a lesser chance the pair could also move as far as 100% of the height, which would give an upside target of 157.35.
Momentum, as measured by RSI, in the lower pane of the chart, has turned down after a bullish rise.
The pair has successfully broken above the 50-week moving average (MA) on a closing basis, which is no mean feat given how tough major MAs are as obstacles to the trend.
It is often the case that prices will stall, pull-back or even reverse after touching them.
The effect is heightened by short-term technical traders fading the trend at the level of the MA in anticipation of just such a counter-trend move.
There is a risk the current pull-back will go so far that it invalidates the breakout from the wedge and the break above the MA.
A move below 146 on a closing basis, would invalidate the bullish case.
The Japanese Yen: What to Watch
The main release for the Yen in the week ahead is the current account balance which is forecast to show a ¥1897bn rise in the surplus in August when it is released at 00.50 B.S.T on Tuesday morning compared to the ¥2010bn in July.
The current account is the broadest measure of balance of payments for a country and a surplus indicates more inflows than outflows, which is generally positive for a currency since it indicates increased demand. If the surplus falls more than currently forecast, however, it may weigh on the Yen, and vice-versa if it rises unexpectedly.
Another major release for the Yen is Machine Orders in August, which is forecast to show an -4.0% fall month-on-month, up from the 11.0% rise of the previous period, when it is released at 00.50 on Wednesday.
The metric is a rather volatile series, however, which often shows double-digit changes from month to month, so a response from the Yen may be limited.
The tertiary industry activity index is a measure of the change in the total value of services purchased by businesses.
It is a leading indicator of the economy. It is scheduled for release on Friday, October 12 at 5.30. A higher-than-expected result would be positive for the Yen and vice-versa for a negative result.
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