Chart Of The Day: What The GBP/JPY Pair Signals About Current Risk Sentiment
Pinchas Cohen | Dec 21, 2021 22:34
The pound sterling rose on Tuesday, in line with other risk assets, as sentiment recovered from the Omicron-induced selloff that's weighed on markets since last week. The British currency was up as much as 0.5%, but we're betting the move won't last.
Given the latest news, which Tuesday morning included an announcement from drugmaker Moderna (NASDAQ:MRNA) that the company could be ready to develop an Omicron booster within weeks, the UK is holding off on lockdowns ahead of the Christmas holiday and the crucial shopping season that precedes it, in consideration of the domestic economy.
Business confidence in Britan is waning as the island country's economy contracts sharply .
Conversely, Japan just upgraded its economic outlook for the first time in 17 months, signalling increasing confidence due to rising consumption, business confidence and jobs creation. As well, since Japan's currency, the yen, is considered a classic safe haven asset, if the overall situation in the UK was to worsen, institutions might decide to divert capital to yen and yen-denominated assets.
Trading on the GBP/JPY could provide some insight into how strong risk sentiment might actually be right now.
The pair has struggled to maintain its short-term incline since the Dec. 3 bottom. Any ideas that the pair showed a recent advance should be offset by the caveat that the GBP/JPY has been flat for nearly a month (dotted black line).
When a rebound churns after a sharp selloff, as is visible on the daily chart, there's a good chance it's a rising flag. It's considered bearish as the pattern is of the continuation variety. Technical analysts expect it to be nothing more than an interruption of the underlying downtrend, clearly demarcated by the red falling channel, in which sellers and buyers both know their place.
Technicians identify this advance as more short-covering than actual long positions. In other words, sentiment hasn't really changed—traders continue to remain bearish, as early short-sellers lock in profits by buying contracts to return to their brokers, while additional bears come out of hibernation and enter shorts.
The price fell below the three major moving averages, with the 100 DMA already having crossed below the 200 DMA.
As momentum fades, the RSI is failing to achieve the same heights as in November.
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Via the weekly chart it's easier to comprehend the magnitude of the current flag within the falling channel. Since March, the market has been working out the value of GBP/JPY on a support line above the psychological round 150.00 level.
Three times now the price has attempted to climb back above the 50 WMA after falling below it. This moving average marks the resistance of the flag.
The MACD and RSI are both providing bearish signals. The MACD's short MA crossed below its long MA for the second time after an attempt to unravel the bearish cross since June. The RSI registered a low trough and found resistance when climbing back above the August low.
Still, the price could potentially blow out the flag on the support of the horizontal trendline, which could prove to be the neckline of a complex H&S top. The price could continue bumping its head beneath the broken uptrend line since the March 2020 bottom. Meaning, the pound would still be subject to a reversal, but it would just take a bit longer.
Therefore, traders need to determine their level of risk aversion and develop a strategy that suits them. There are always going to be losing trades—one just needs to learn how to manage them.
h2 Trading Strategies/h2Conservative traders should not short before the price falls below the support line since March.
Moderate traders would risk a short after the flag's completion.
Aggressive traders could enter a contrarian, long position, counting on both the horizontal trendline as a potential neckline, and the bottom of the flag, where the price is finding support. Upon reaching the flag top, they'd short the pair. Money management is critical. Here's an example to showcase the essential points:
Trade Sample
- Entry: 150.00
- Stop-Loss: 149.50
- Risk: 50 pips
- Target: 151.50
- Reward: 150 pips
- Risk-Reward Ratio: 1:3
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