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Pound-Yen Forecast: Continuing to Form Highly Bullish Pattern

Yen note

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- GBP/JPY is continuing to form a bullish pattern

- Bull pennant suggests much higher prices for pair

- Yen to be driven by investor risk appetite

The Pound-to-Yen exchange rate is trading at around 140.42 at the start of the new week after rising 0.41% in the week before. Studies of the charts suggest the pair is pausing in a sideways range within an uptrend but that the directional bias is still bullish.

The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair trading sideways in a tapering triangle formation after peaking at the October 17 highs.

Four hour chart GBPJPY

Due to the fact that the pair is in an established uptrend, the balance of probabilities still favours an eventual breakout from the triangle higher and a continuation up to a target at 144.00 at the level of the upper trendline.

A break above the 141.50 highs would provide confirmation of such a continuation higher.

The daily chart is showing the formation of a bullish pattern called a ‘bull pennant’.

Daily GBPCHF

The pattern is made up of a steep rally, called the pole’ followed by a sideways triangular sideways range - the whole pattern is called a ‘pennant’, after the triangular flags which flew from medieval castles.

A break above the high of the pattern at 141.51 provides the necessary confirmation to expect a continuation up to a target at 145.60 initially, followed by 150.000 eventually.

Targets are based on the length of the pole which is extrapolated from the point of the pennant higher. The first, more conservative target, is based on a 61.8% extrapolation and the second on a 100% extrapolation.

The daily chart is used to give an indication of the outlook for the medium-term, defined as the next week to a month ahead.

The weekly chart shows the pair rising up within the broader wedge pattern.

Weekly GBPCHF

A break out of the wedge would be a very bullish sign for the pair and suggest a move up to a target of 150.00 followed probably by 156.00 at the level of the January highs.

The weekly chart is used to give us an indication of the outlook for the long-term, defined as the next few months.

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The Japanese Yen: Threatened by Perking up of Investor Sentiment

The main fundamental driver of the Japanese Yen in the near-term is likely to be global investor risk appetite since the currency acts like a safe-haven, which means it gains when investors grow fearful and shift their money to ‘safer’ investments. Notable examples of other safe-havens apart from the Yen include the Swiss Franc and gold.

The Yen has been falling recently as investors have grown more confident about a brighter global economic outlook on the back of better prospects for world trade.

“Market sentiment remains buoyant to start the week. Equities, bond yields, breakeven inflation and crude oil have all risen, pointing to greater market optimism around the global growth outlook,” says Nick Smyth of BNZ Bank.

More upbeat comments from U.S. and Chinese negotiators involved in Phase 1 trade talks are one of the main reasons behind investor’s greater willingness to embrace riskier investments and conversely to move out of safe havens like the Yen.

“Comments from the US and Chinese officials on trade negotiations remain upbeat,” says Smyth, “with Commerce Secretary Wilbur Ross saying yesterday that talks were “very far along” and he was “quite optimistic” that Phase-One would be signed off.”

Ross’s optimism has even led to speculation that the U.S. might suspend the tariffs scheduled for December and possibly even put off auto tariffs on European imports, removing a further risk factor from the global outlook - a negative for the Yen.

The general tone out of Washington regarding trade is “signalling a more generalised dialling down of trade hostilities by the US administration,” says Smyth.

A further risk factor on the horizon is the ISM non-manufacturing PMI, which along with its cousin the ISM manufacturing PMI is one of the most important economic indicators of the health of the U.S. economy.

A recent concern amongst investors has been that the slowdown in manufacturing witnessed in the U.S. could be migrating over to the hither-to resilient services sector of the economy, and if this happens, that it could precipitate a recession in the United States.

Fear of such contagion has heightened the focus on the non-manufacturing sections of the economy including the ISM non-manufacturing PMI out at 15.00 GMT on Tuesday (today).

“The market’s focus is the non-manufacturing ISM survey, released tonight, for an updated read on the US services sector. The survey has slowed this year and last month hit a three year-low of 52.6, but it remains significantly more positive than the manufacturing equivalent,” says Smyth.

The consensus estimate amongst economists and analysts is for the gauge to come out at 53.5 in October from 52.6 previously.

A higher than expected reading should be taken as positive or bullish for the USD but negative for the Yen, while a lower than expected reading should be taken as negative or bearish for the USD but positive for the Yen.

The employment sub-component of the ISM is also likely to attract attention as it has been falling quite steeply over recent months, suggesting underlying weakness from a slowdown in hiring.

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