Pound-Yen Rate's to Extend Step Decline Lower, some Risk of Range Developing
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- GBP/JPY in downtrend with risks of a range evolving
- Momentum converging bullishly with price
- Yen to be driven by reaction to Powell and China data
The Pound-to-Yen exchange rate is trading at around 135.80 at the time of writing, 0.40% down so far this week, and studies of the charts suggest the exchange rate will probably either enter a sideways period or continue its broader downtrend in the days to come.
The 4-hour chart shows how the pair’s step decline lower has continued unfolding, although the declines more recently have been interspersed with stronger periods of recovery indicating downside momentum could be waning.
The old adage that ‘the trend is your friend’, however, suggests a continued downside bias and we note the formation of a possible ‘measured move’ pattern which could take the exchange rate down to a target at 133.50.
Measured moves are three wave zig-zags in which the first and third waves are usually of similar length. A break below a confirmation level at 135.00 would provide the green-light for the extension lower.
There is also a strong possibility the pair could stall and start going sideways instead since the RSI momentum indicator in the lower pane is converging bullishly with price.
Convergence happens when price makes a new low but RSI does not. The non-confirmation suggests waning downside momentum and an increased risk of the downtrend stalling or rebounding.
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 how the pair has been trending lower since the beginning of May and that this trend is more likely to extend than reverse. A break below the 135.00 level would probably lead to a continuation down to a target at the key December lows at 131.00.
There is also a strong possibility the pair could stall and start going sideways since the RSI on the daily chart is also converging bullishly with price.
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 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 December lows at 131.00 and then perhaps a bounce as these are key support lows.
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 Benefits on Powell Testimony
The main driver of the Yen remains global in nature, with a sell-off in the Dollar over the past 24 hours providing support.
Both the minutes of the Federal Reserve’s June meeting deliberations and testimony from Fed Chairman Jerome Powell to policymakers in Washington suggested an increased probability of an interest rate cut in July, to provide insurance against future economic weakness.
The trend towards the Fed cutting interest rates, as well as continued political pressure for a weaker Dollar, seem to suggest an environment in which the Yen will probably gain.
Despite the U.S. economy showing signs of strength the risks of disruption, mainly from exogenous factors, remains high as noted by Powell in his testimony.
“Powell outlined the Fed’s baseline that the US economy remains “solid” and the labour market “strong” with inflation expected return to target. But he emphasised a long list of downside risks including the global growth slowdown, the US debt ceiling, Brexit, the trade war, and the “risk that weak inflation will be even more persistent than we currently anticipate,” says Nick Smyth an analyst at BNZ in a note this morning.
More testimony from Powell and other Fed officials is scheduled for today (Thursday) with the potential for the risk apple-cart to be further shaken.
The next major data event on the horizon for risk-sensitive assets is Chinese trade data out on Friday, July 12. This will indicate how much the global slowdown in manufacturing and the disruption to supply chains from the trade war is impacting on Chinese exports.
A major decline could very well set off global market jitters and support the Yen. Currently, the data is expected to actually show a rise in the trade surplus to $44.6bn from $41.7bn - mainly because of a greater decline in imports.
This is followed by Chinese Q2 GDP data out on Sunday evening. Current consensus expectations are for a decline to 6.2% from 6.4% year-on-year in Q1. A deeper decline would sound alarm bells about the state of China and by extension the global economy and also lead to a rise in Yen.
There is even a possibility that the Yen could rise on ‘risk-averse’ inflows on Friday ahead of the weekend as investors adopt caution positioning before the event.
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