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- GBP/JPY has undergone reversal since the Jan lows
- Short-term trend now constructive and likely to extend
- Yen to be driven by global investor sentiment
GBP/JPY is trading at 139.30 at the time of writing, about 0.25% higher on the day, as the Pound continues rising, partly helped by Japanese Yen weakness due to more upbeat sentiment regarding China.
The pair is likely to encounter much volatility after tonight's vote on the government's withdrawal bill, yet with fears of a ‘no-deal’ continually diminishing as Parliamentarians heap amendment upon amendment, downside could be limited even in the likely event of a defeat for the government.
From a technical perspective, the outlook favours the recovery higher to extend.
GBP/JPY was in a downtrend which spiked sharply lower during the flash crash on January the 3rd, falling from the 1.37s down to the 1.31s in the space of only a day.
In hindsight, these lows now appear to be a key bottom for the pair from which it has bounced quite firmly.
Much of technical analysis lies in determining the direction of the dominant trend which it is then assumed will continue.
The question now is, therefore, has the bounce since the flash-crash lows risen far enough to confirm a new uptrend or is the pair still in its old downtrend?
One sign the pair may have started a new uptrend is that it formed a long, bullish, Japanese ‘hammer’ candlestick during the flash-crash lows and this is often a sign the trend is changing, especially when it punctuates the bottom of a downtrend.
The same pattern is present on both the weekly and daily charts.
Another sign the pair may be changing trend is the overshoot it made below the bottom of the wedge pattern it has formed since the January 2018 highs.
This overshoot occurred during the January 3 flash crash lows and is often indicative of an ‘exhaustion move’, signaling the end of quite major trends, thus adding further grist to the argument that the pair is at the start of a stronger uptrend.
The pair has formed an uninterrupted sequence of peaks and troughs on the 4hr chart - more specifically of two or more higher lows (HL) and higher highs (HH), which suggests the establishment of short-term uptrend, adding to the evidence of more potential upside.
Overall the short-term uptrend is likely to continue rising.
The key August lows at 139.90 is an impediment to progress higher and would need to be broken to confirm a continuation higher, but a break above the current highs at 140.44, would be necessary to provide confirmation of more upside to a target at 142.00.
The fundamental outlook is dominated by Brexit for the Pound and risk appetite for the Yen. If May's deal gets voted down Sterling could suffer from some short-term weakness but is unlikely to stay down for long as the chances of a worst-case-scenario disorderly Brexit remain minimal.
The Yen could be heavily dependent on Chinese data and the general economic outlook. Trade data showed a steep slowdown on Monday stoking fears of a contraction. House prices are out on Wednesday 16 and given the old adage that housing leads the economy, could also be important. Q4 GDP is then out on Monday 21.
The trajectory of the US stock market could also affect safe-haven flows, with further losses also bolstering the Yen.
The key hard data release is inflation data for December, which is out on Friday at 00.30 GMT. Headline inflation is expected to slow to know 0.3% compared to a year ago, and core inflation is expected to slow down to 0.8%.
Prepare for moves in Sterling and order your ideal exchange rate in advance. Foreign exchange specialists at RationalFX will be working extended trading hours today to deliver advantageous rates to their clients. To get in touch with the team at RationalFX, please see here.