GBP/JPY Sell-Off Probably only Temporary

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- GBP/JPY has weakened at start of new week

- Overall medium-term outlook is still bullish

The Pound-to-Yen exchange rate is trading at 146.41 on the interbank market at the time of writing following a sharp decline at the market open as traders bet the chances of a 'no deal' Brexit were rising once more.

News reports surfaced over the weekend that the E.U. would reject the government's latest backstop proposal sending Sterling lower before a rebound was sparked by news that according to the E.U.'s Michel Barnier a deal was in fact close at hand.

Despite contradictory signals and short-term volatility, the charts are on balance bullish GBP/JPY in the week ahead.

On the weekly chart, the pair has managed to break out of a wedge pattern again after forming a bullish two-bar reversal two weeks ago (circled), and although it then formed a bearish 'gravestone doji' the week after, the two have probably canceled each other out overall.

Nevertheless, bulls probably just about have a advantage. The exchange rate is still trading back above the upper border of the wedge, which suggests it is trading with a bullish inclination and will probably continue higher once it has finished pulling back. Indeed, pull-backs such as these often occur just after a breakout from a price pattern, when the exchange rate temporarily pull-backs to the just-broken line; they are called, 'throwbacks' and merely represent a step back before the next move higher.

It is also possible to see the whole move higher from the October lows as an unfinished abcd pattern in which leg c-d is likely to be of a similar length as a-b. If that really is the case then the pattern has higher to go, with an upside target at 152.50. A break above the 150.00 level would provide confirmation. 

GBP/JPY has just fallen into both the 50 and 200-day moving averages (MA) at 146.70 and 147.70 respectively and these are likely to 'prop-up' the exchange rate and could provide the basis for a reversal higher because large MAs act as major supports. Yet, as with the weekly chart, we would want to see a break above the 150.00 level for confirmation.

The 4hr chart shows the pair has formed a declining sequence of lower highs and lower lows since the pair peaked on November 8. This is is one sign indicating that the short-term trend has turned bearish.

Yet, at the same time, the pair has just formed a two-bar reversal pattern at the lows and bounced - a bullish short-term indication. It would now require a clear break below the upper border of the wedge, and below 145.50 to confirm a continuation down.

Such a move would probably lead to a fall down to a target at 144.00. Despite the short-term trend potentially being bearish, however, our base case remains, on balance, for the uptrend to resume and continue up to 152.50 eventually.

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Japanese Yen: What to Watch

The main release for the Yen in the week ahead is GDP data, out at 11.50 GMT, on Tuesday evening.

GDP is forecast to show a decline of -0.3% in Q3 compared to the 0.7% rise in Q2.

A slowdown of that magnitude - or deeper - would put pressure on the Yen, although in Q1 the growth rate was also negative at -0.2%, so it would not be anything 'new' as such.

Japan's growth has been anemic for years so a negative result merely maintains the status quo.

The other main data release in the week ahead is the tertiary industry index, in September, which is forecast to show a -0.4% drop month-on-month, when it is released at 4.30, on Wednesday, November 11.

Another important driver for the Yen includes investor global risk appetite. Risk appetite is currently negative mostly because of Italian budget and Brexit fears, and it is likely to get worse in the week ahead when the Italian government is set to present a revision of its budget to the EU commission.

Early reports suggest that the budget will still breach EU rules and will, therefore, most probably be rejected. If it is, there will be a standoff, much volatility in the bond market, and concerns about the stability of Italian banks.

This, in turn, will probably help the Yen which is a safe-haven and therefore strengthens from increased inflows during crises. This suggests the Yen could get underlying support from risk sentiment in the week ahead.

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