GBPJPY had been trading below a descending trend line on its 4-hour time frame earlier this year before an upside breakout took place, signaling a potential reversal. In addition, a complex double bottom pattern has formed and price is currently testing the neckline resistance at 161.00-162.00. A bullish flag can be seen so an upside break from this consolidation formation could confirm another potential rally.
The 100 SMA is still below the longer-term 200 SMA for now so the path of least resistance is to the downside. Also, stochastic is indicating overbought conditions so profit-taking could bring price down. RSI is also pointing down and might indicate a return in selling pressure.
A pullback to the broken trend line around 156.00 could be possible before the pair resumes its climb. This is close to the moving averages, which might hold as dynamic support levels from here. A move back below the trend line, however, could keep GBPJPY on its long-term downtrend.
The main catalyst for this trade this week is the BOJ interest rate decision on Thursday’s Asian trading session. Traders are speculating that policymakers could increase their stimulus efforts to counter yen strength, which is dampening domestic inflation, and to support earthquake rebuilding plans.
Data from the Japanese economy has been mostly weak, particularly when it comes to manufacturing and consumer spending. Inflation has also been subdued and far from the government’s targets.
Meanwhile, anti-Brexit comments have been supporting the pound, especially if these could swing the votes in favor of staying in the EU. Opinion polls are still showing a pretty even split lately and data from the UK has also been mostly weak.
By Kate Curtis from Trader’s Way