GBP/JPY in focus amid Brexit talks and data next week

As we approach the end of the week, a sense of calmness could be felt across the markets. But looks can be deceiving and things could turn volatile again very quickly, so don’t take anything for granted.

The stock markets remained on the edge this week as bond yields eased slightly while the dollar bounced back. As we approach the end of the week, a sense of calmness could be felt across the markets. But looks can be deceiving and things could turn volatile again very quickly, so don’t take anything for granted. Meanwhile in the UK, Prime Minister Theresa May is expected to unveil more details of the Government’s Brexit vision as she is due to speak about Britain's post-Brexit relationship with the European Union, in London on Friday. The negotiations will restart on Monday and the main talking points would centre on the transition period. So, the GBP could remain under pressure amid political uncertainty after having made back a big chunk of its post Brexit losses in recent months.

Meanwhile, the Japanese yen, which outperformed this week, could rise further in the event of further stock market volatility boosting its safe haven appeal. Yen has been supported further by positive Japanese data, with Inflation finally responding to years of zero interest rates and QE. If it rises further then the market may start pricing in the prospects of tighter monetary conditions there. This could further support the yen recovery.

In fact, there’s plenty of data from both Japan and the UK coming up next week, which should provide some short-term direction for the GBP/JPY. From Japan, we will have industrial production, retail sales, capital spending, consumer confidence, household spending, unemployment rate and Tokyo core CPI. From the UK, next week’s key data will include the latest manufacturing and construction PMIs.

So, heading into the new week, our featured chart to watch is the GBP/JPY. The Guppy is one of our favourite non-dollar currency pairs because it tends to be one of the most technically-friendly markets. And so it has proved again. After creating a false break above old resistance at 156.00, the volatile currency pair has dropped sharply. Recently it has broken below the pivotal 150.20 level, which was the base of the latest failed rally. Once support, this level has now turned into resistance. In fact, it is a band of resistance between 150.20 and 150.95 that we need to watch and for as long as price holds below here, the path of least resistance would remain to the downside.

However, price is now approaching a significant zone of support…but I wonder whether the buyers will be able to defend their ground here. As per the chart, the area between 147 and 148 is where several technical factors converge. As well as previous support and resistance, we have a long-term bullish trend line meet the 20-day moving average here. Thus, if the buyers fail to defend this area then we could potentially see a significant drop in the coming days, with the next key support being all the way down at 142.50.

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.