The tide seems to be turning against Guppy these days, as the pair broke below a short-term rising trend line and is forming a reversal chart pattern. I’m gonna keep close tabs on this formation in case this week’s U.K. PMI readings miss expectations.
GBP/JPY Trade Setup
Price seems to have hit resistance at the nearby area of interest at the 145.00 major psychological level, allowing the right shoulder to form, but it has yet to break below the neckline at the 143.00 handle before confirming the potential selloff. I haven’t set any entry orders yet since I plan on waiting for the U.K. services PMI to come out first.
Analysts are expecting the figure to fall from 55.2 to 54.8 in December, reflecting a slower pace of industry growth. To top it off, pound traders seem to be bracing themselves for lackluster domestic demand in the U.K. as the sharp gains in price levels are bound to weigh on the spending power of consumers.
With that, I’m expecting sterling to give up its recent gains while bulls ease up on their long biases ahead of Brexit negotiations later on this year. After all, this could bring a lot of uncertainty for the Brits, particularly if the EU seems set on making a “hard Brexit” happen.
As for the Japanese yen, the BOJ’s reluctance to bump up its quantitative easing efforts could keep a lid on its losses for the time being. However, I’m a bit worried that the recent data misses when it comes to inflation and household spending might prompt some form of stimulus from the central bank. Then again, the currency’s slide for the last couple of months of 2016 would probably put some upside pressure on price levels, convincing BOJ policymakers to just sit on their hands.
To top it off, I’m sensing some risk-off vibes in the Asian region as reports have shown massive capital outflows from China even while the government has already imposed some restrictions. This translates to slower local investment activity, which can’t be good for the performance of the world’s second largest economy but could be positive for the lower-yielding yen.
I’ll be ready to hop in a short position if the U.K. services PMI disappoints or if the neckline at 143.00 breaks. The chart pattern is around 500 pips tall anyway so there’s enough downside for at least a 1:1 trade even with a stop past the shoulders at 145.00.
As always, remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t simply follow what I do.