Pound-Yen Outlook: Wipe away the Volatility and Sterling is Still Looking Constructive

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- GBP/JPY is trading in a volatile sideways range

- Bullish wedge and monthly pivot swing suggest upside to come

- Vote on Brexit deal main event for Pound; Yen to be moved by risk sentiment

GBP/JPY is trading at 145.07 at the time of writing and is moving in volatile swings, but our technical studies suggest that once the noise of Brexit newsflow is removed the pair remains pointed higher.

The near-term volatility in the GBP/JPY is symptomatic of that beseting all Sterling-based pairs: the Pound has fallen after Geoffrey Cox, the attorney general, said the concessions Prime Minister Theresa May won from the EU overnight concerning the Irish backstop are immaterial from a legal perspective.

The meaningful vote on the government’s latest deal will happen this evening (Tuesday) and hopes the government might actually succeed in winning the backing of the majority of Parliament for their deal crumbled in the last hour after the attorney said the changes to the backstop were of marginal value. Leading into Cox's assessment Sterling was riding high as markets bet that concessions gained by May in Brussels overnight might just do the trick.

While the fundamental picture facing Sterling turns on a dime and is difficult to read, the use of technical analysis to try and navigate the way forward becomes increasingly of value. As Piotr Matys, an analyst at Rabobank notes:

"One of the main advantage when looking at the markets from the perspective of technical analysis is that a narrative is not required to understand market sentiment."

From a technical perspective, the outlook for GBP/JPY marginally favours more gains again, as the pair - albeit stutteringly - attempts to resume the uptrend it began after the 132.000 December lows. These very much looked like ‘exhaustion lows’ and if correct that would mean a stronger punctuation mark ending the previous downtrend.

The exchange rate is pushing up against the top of a long bullish wedge pattern, suggesting the potential for substantially more upside to come. Confirmation of a bullish extension would come from a break above the 148.58 February highs, which would then provide confirmation of an extension up to an upside target at 152.50 at the level of the 200-week moving average (MA).

The pair remains below the 50-week MA at 145.33 at the time of writing and if this is the case at the end of the week it would be a bullish sign for the pair.

The monthly chart shows a ‘pivot swing’, which is another bullish signal, especially medium-term.

The pivot swing occurs over a period of three months in which the exchange rate falls, forms a new trough low, rotates and breaks above the previous month’s high.

The successful break above the December highs at 145.55 on the monthly chart gave a bullish pivot swing signal on GBP/JPY. The hammer pattern which formed during the month of January is a further bullish sign.

The daily chart simply shows price action in more detail. The pair has pulled-back over recent weeks and then suddenly recovered strongly higher over the recent two days, most recently it has once again declined back down below the top of the bullish wedge.

Only a clear breakout from the wedge would signal a more bullish outlook. However, if that was the case it would suggest the onset of a strong phase of upside activity given the potency of the bullish wedge as an indicator.

The Japanese Yen: What to Watch

The main event for the Yen is ostensibly the policy meeting of the Bank of Japan (BOJ) on Thursday at 23.00 GMT, however, no-change is expected, either in policy, which remains ultra accommodative or in the language of the BOJ’s forward guidance.

Inflation remains too low to anticipate an interest rate hike from the BOJ and lack of economic growth means that, if anything, the bias may be to further ease policy and not tighten it.

“Investors are not anticipating any change in policy by the bank as their targeted inflation, which excludes fresh food prices, remains confined just below 1%. However, Governor Kuroda will probably stick with recent language in his press conference and repeat that the Bank would consider easing policy if the economic slowdown threatens the progress towards achieving its 2% inflation goal, even as the debate within the board on the possible side-effects of a prolonged period of easy policy rumbles on,” says Raffi Boyadijian, an economist at XM.com.

The Yen could also be impacted by investor risk appetite and geopolitical events since it is a safe-haven currency which rises during periods of turmoil, one of which could be Brexit, given the vote on the government’s withdrawal bill, on Tuesday, March 12 (today), and the proximity of the Brexit deadline on March 29.

A further factor which might influence investor risk appetite are trade-talks between the U.S. and China. If there is a breakthrough on the horizon the Yen it could be impacted negatively, and the achievement of some sort of detente is, in fact, the base case scenario for most analysts.

There is more of an incentive for both superpowers to make a deal rather than start a trade war because it is economically in their best interests. This is especially the case given the growing U.S. trade deficit due to falling exports to China and for China due to its current broad economic slowdown.

Trade talks more recently have been focused on currency manipulation, and although the Chinese are not ready to fully liberate their currency, that have also said that they will “avoid competitive devaluation” according to commentators.

White House economic advisor Larry Kudlow said there was a breakthrough with China agreeing to promote stable currency and avoid competitive devaluation. He’s “positive and bullish” on a US-China trade deal, and he expects the agreement to be finalized by April.

Piotr Matys at Rabobank: "One of the main advantage when looking at the markets from the perspective of technical analysis is that a narrative is not required to understand market sentiment."