Pound vs. Yen: Still Giving Bullish Chart Signals

- Despite 10 up days in a row charts still giving bullish indicators

- Formidable resistance at 200 day MA means 'caution' is the watchword

- Inflation is main release for Yen this week

GBP/JPY continues to show bullish indications at the start of the new trading week, despite an unbroken run of 10 up-days in a row.

The pair has formed another 3-bar bullish continuation pattern, which strongly recommends an extension of the short-term uptrend, by about one and a half yen, assuming the exchange rate can break above the 141.40 highs.

The pair has also just broken above the neckline of a bullish double bottom chart pattern, which resembles the letter 'W' and often appears at the bottom of downtrends as a reversal signal.

The exchange rate successfully broke above the neckline at 148.15 and is now highly likely to reach the conservative target for the pattern at 151.21.

The target is calculated by extrapolating the golden ratio (0.618) of the height of the double bottom from the neckline, according to technical lore.

A further bullish signal comes from the Cloud chart of the pair, also known as the 'Ichimoku chart'. This is a form of analysis popular in Japan so it is often useful as an analysis tool for Yen pairs as Japanese traders will often make decisions based on the Cloud chart.

In this case the exchange rate has broken clearly above the top of the cloud which is a very bullish sign for the pair as it indicates a de facto change of trend, and the pair is now more likely to go up than down.

Set against these bullish signals, however, are some formidable obstacles.

The first is the 200-day Moving Average (MA) situated not far above the current rate at 149.55. It is likely to act as a tough obstacle for bulls to overcome. Many traders make decisions based purely on the 200 MA and this increases supply and demand around the MA. The exchange rate often pulls-back initially and sometimes reverses altogether.

Further, short-term traders, often ride these pull-backs with intraday sallies and scalps further increasing volume and volatility.

Another major obstacle is the major trendline at about the 150 level. This acts in a similar way to the MA. Again there is a chance the exchange rate could reverse at the trendline and start moving lower again. If it breaks above, however, it will add new impetus to the uptrend.

Overall, we have found experience tells us that clear chart patterns usually trump levels of resistance, which leads to a mildly bullish bias, however, traders should still be careful around these formidable chart levels.

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Inflation Data on Tap

As far as fundamental data hotspots in the week ahead go, the main one is Japanese inflation data for June, out on Friday, July 20 at 11.30 GMT.

Headline inflation is forecast to rise by 0.8% in June compared to a year ago, from 0.7% in May.

Inflation ex food and energy is forecast to rise by 0.4% from 0.3% in May.

Wage data in June was stronger than expected, suggested possible upwards pressure on inflation as workers receive more take home pay.

Another major release for the Yen, is balance of trade at 11.50 GMT on Tuesday, July 17. It is forecast to show a surplus of 534bn yen compared to the -578bn deficit of the previous month.

A upside surprise to inflation figures would be required (above forecasts) to generate upside for the Yen.

Higher inflation will spur a change in Bank of Japan (BOJ) monetary policy which remains ultra-loose by international standards.

Loose monetary policy generally weakens the host currency as it is a sign of lack of growth.

"The Bank of Japan’s progress in lifting inflation towards its 2% goal has stalled in recent months. After hitting a 3-year high of 1% in February, the 12-month rate of core CPI has since eased to 0.7%. It is forecast to tick higher in June to 0.8%. But the snail’s pace progress means the BoJ will stick on the course of ultra-loose monetary policy for a while longer," says commentary from FX new website Actionforex.com.

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