GBP/JPY Setting Up For Potential Failure

By: Richard_Cox

For the most part, financial markets have stabilized this year as volatility has slowed and overall risk aversion has been largely absent.  These types of trends can have a significant impact on sentiment and the ways that specific asset types are traded, so it is critical for market traders to have a sense of where we stand in terms of generalized uncertainty.   This is especially true for forex traders, as there tends to be higher levels of short-term positioning seen in those markets.

The improved global economic situation has helped carry trades in the forex space, as these interest-gaining positions tend to perform best when stocks are rising.  We are still seeing equities hold most of their multi-year gains, so it is not entirely surprising that we are seeing currency pairs like the USD/JPY and EUR/JPY moving toward new highs.  But when we pair the JPY with the GBP, an alternative scenario seems to be unfolding.  And if you are long in these markets, it might be a good idea to start collecting profits.

Trend Activity: GBP/JPY

Source:  DailyForex

In this GBP/JPY weekly chart, we can see that the pair has been in the midst of a strong uptrend since the middle part of 2013.  Currency pairs that are denominated in Yen tend to be highly influenced by trend momentum, and this is a bullish factor that should be considered when you are looking to trade in the GBP/JPY.  But the current price structure is generating the initial portions of a Head and Shoulders pattern, which is a highly bearish event that signals an uptrend has reached its exhaustion point.

If this turns out to be the case, we will likely see a rise back toward the 191 area before meeting short term resistance.  Confirmation would then be seen if the GBP/JPY falls through the “neckline” which is now visible near 176.  This would suggest that a long term top is in place and that it makes more sense to start taking a defensive position in the GBP/JPY.  Conversely, the outlook would be negated is we were to see a rally through 191.  This would ultimately suggest that the uptrend is still in place and that we are likely in for a test of the psychological resistance now seen at 200.  In all, the balance of the evidence is still negative for the GBP/JPY -- but this does not completely rule out another bullish run at 200. 

By Richard Cox

© 2015 Richard Cox - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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