Pound-Yen Set to Continue Downtrend
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- GBP/JPY is pulling back in established downtrend
- Break below June 18 lows key to extension lower
- Yen to be driven by global risk trends
The Pound-to-Yen exchange rate is trading at around 136.50 at the time of writing, a tenth of a yen lower than a week ago, and studies of the charts suggest the exchange rate is set to continue its broader downtrend in the days to come.
The 4-hour chart shows how the pair has started correcting back in a rising channel higher.
The pair recently touched the top of the channel and fell lower, and it is forecast to continue falling down to the rising channel line at 136.05 initially.
After that, it is possible the pair could respect the channel lines and rally higher or break down out of the channel.
A break below the 135.75 June 25 lows would confirm a move back down to the 135.35 June 18 lows.
The RSI momentum indicator is bearishly inclined and suggestive of more downside rather than a continuation of the channel higher. On its own, however, it is not enough to confirm more downside.
We use the 4-hour chart to give us an indication of the short-term outlook which includes the week ahead.
The daily chart shows more clearly how the pair is in a longer-term downtrend.
The rising channel looks more like a correction of the bear trend rather than a reversal and suggests a resumption lower will probably develop.
A break below the 135.35 June 18 lows would provide confirmation of a continuation lower to a target at 132.00.
The daily chart is used to analyse the medium-term outlook which includes the next couple of weeks to a month.
The weekly chart shows the large wedge pattern which the pair has been forming since the start of 2018.
Although wedge patterns are generally considered as bullish patterns the exchange rate is currently falling within the pattern after a false breakout at the start of the year.
The downtrend is so entrenched that we expect a continuation lower to the bottom of the wedge at 128.00 in the long-term subject to confirmation at intermittent levels in between.
We use the weekly chart to give us an idea of the longer-term outlook, which includes the next few months.
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The Japanese Yen Stuck to Global Risk Trends
The main driver of the Yen remains global risk appetite, with the currency's safe-haven attributes ensuring it benefits when investors grow fearful, likewise it tends to struggle when they grow confident.
The main event in terms of risk trends was the G20 meeting which has now passed and news of a compromise between the U.S. and China helped support risk appetite at the start of the week which has weighed on the Yen.
The U.S. agreed to lift their ban on sales of components to Huawei and China responded by increasing imports of U.S. agricultural products to China.
The two superpowers also agreed not to increase tariffs, however, no official, cast-iron, promises were made and there remains the risk a trade war could still flare up at any time.
The strong lift to sentiment from the trade talks at the G20 was marginally offset by negative PMI data released from China.
Both the official and Caixin manufacturing PMI surveys undershot expectations and the latter fell unexpectedly into contraction territory. Caixin covers smaller and medium-sized companies.
The People’s Bank Of China (Pboc) responded to the door data by saying they were planning to lower interest rates to facilitate lending and help businesses through the rough patch.
Looking at the domestic picture, Japanese domestic data has been overall poor: the second-quarter Tankan survey showed the large manufacturing index deteriorated to the worst level in nearly three years.
However, the data is not so bad that it is likely to impact on Bank of Japan policy and therefore the Yen.
Japanese manufacturing PMI undershot expectations. It was finalised at 49.3, revised down from 49.5.
Consumer confidence dropped to 38.7 in June, down from 39.4 and missed expectation of 39.2.
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