› GBP/JPY is stuck near important resistance: what’s next?

GBP/JPY is stuck near important resistance: what’s next?

The British Pound continued its bullish performance across the board this week, underlining the suggestion that the local bottom has been found. At least for the nearest future. Currency speculators refused to push the Sterling lower despite the lack of any significant achievements on the Brexit front last week as British lawmakers failed to pass the vote for May's deal conditions through the Parliament. This week brought some sort of optimism at a level of rumours and talks so far. Britsh Prime Minister announced several improvements in the re-negotiation process with the European Union regarding the divorce conditions. The fact that pound has been oversold recently was confirmed with GBP/USD bouncing above 1.3000 handle and testing 1.3100 resistance for the second time this year. As a result, GBP cross-rates jumped rapidly and GBP/JPY was not an exception.

Another fundamental reason for such a risk appetite is related to the general optimistic sentiment on the back of productive negotiations for the trade deal between the United States and China. Global equities continued edging up, creating an additional supply for the Japanese Yen. For instance, USD/JPY climbed to 111.00 level, despite the overall greenback's weakness. At the same time, the US dollar index dropped from the local bottom, failing to break through the crucial technical resistance of 97.70. Moreover, there are rumours in the foreign exchange market that the Bank of Japan is going to announce another round of softening of the monetary policy conditions, imposing more stimulative measures. Traders could be surprised in terms of how come a negative level of interest rates might be widened? Well, it seems that the Bank of Japan has a joker in the pocket. The regulator might offer additional liquidity and cheaper borrowing capital in order to support local exporters and weaken the yen further. Anyway, first two weeks of March will show the real intentions of BoJ.

There is one more hidden reason for GBP/JPY to keep climbing higher. That’s a carry-trade capital flow. Recent reports show that global investors are interested in higher yields than the US Federal Reserve can offer. The latest FOMC’s decision to stop hiking the interest rates and even decrease the volume of quantitative tightening forced investors selling US dollars, seeking more attractive assets. Emerging markets are shining again with the record-high volume of investment this year. GBP/JPY is one of such financial instruments, reflecting the overall risk appetite. But the key question is could the pair sustain the recent bullish momentum? Is there enough room to go further North? The long-term technical analysis can answer those questions.

The daily chart below clearly shows that the point of no return has been overcome this week and here is why. First, the descending channel (blue trendline) has been breached by the price. Second, a series of higher highs has been charted (144.502 and 144.645), which is the bullish trend confirmation. As a result of that achievement, an ascending channel has been built with the green trendline as the base or support. The resistance is unknown so far, and it will be clarified later. Third, the Ichimoku Cloud trend indicator has completed the bullish reversal pattern, the span had performed the bullish cross and all three lines are in the right order to proceed the going North. The point of no return, as we mentioned it above, is almost equal to Ichimoku's conversion line. Both levels will work as the nearest support now. We mean the cross of green and blue trendline which is placed at 142.832, and the current conversion line level of 143.031 (it's rising though).

GBP/JPY is stuck near important resistance: what’s next?

As a first obvious conclusion, a potential bounce back to the support range of 142.80/143.00 should be considered as deep enough bounce back for fresh buying of call options for GBP/JPY, having in mind a long-term perspective. That’s a conservative approach. An aggressive one suggests buying call options for the pair right by the market price, betting on a fast breakthrough. Anyway, the technical outlook is definitely bullish, so buying put options and standing against such a strong wind would be a suicide.

Coming back to the first question of whether GBP/JPY has enough room to go North or not, the answer is yes. Moreover, a possible breakthrough might lead to a test of the purple dotted median line, which used to work as a support line several times (green arrows). That formation looks like a huge triangle with the top horizontal static target as high as 149.27 yen per pound. So, there is a room around 500 more pips to go North. Isn’t that enough to feed a couple of hungry traders?

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