Though GBP has weaken tremendously in recent months, GBP/JPY managed to find its feet to trade higher than the swing lows found back in Jan (see Daily Chart). The gains are not due to GBP’s strength, but rather JPY continued weakness due to BOJ Stimulus bet. Price is now trading within a 150 pip window between the aforementioned swing low levels (around 140) and the 38.2% Fib retracement around 141.5. The upcoming Bank of England Rate Decision will potentially allow price to break the 150 pip channel either side to usher in fresh direction in price which has been listless for the past few trading days.
A break on the upside will open up 50% Fib retracement, which is also the confluence of the swing low back on 17/18th Feb and swing high on early Jan. A break of the level will allow for stronger bullish conviction to retest 148.0 and possibly beyond, as it can be taken as a sign that the reversal from 148 high is over, and the uptrend is back in play again. Conversely, a break below the 140 level opens up 138, and potentially an ultimate bearish objective around 125 region, though 133 may provide some interim support. Stochastic indicator is favoring the upside, but current readings are close to the interim stoch peak near 20th Feb, where readings may peak again.
Hourly chart shows a tight range for the past 3 trading days. Though Ichimoku’s forward Kumo is showing a bearish Kumo Twist, and price is trading below current Kumo, there is no strong evidence that price can simply fall off from here without any strong fundamental driver. 140.50 will be the level to watch, while the swing low on 1st Mar above 139.0 may also provide some support if today’s BOE action is mildy bearish, as oppose to a strong bearish one.
Fundamentally, it is important to note that many traders ma have already priced in a BOE intervention scenario earlier, which explains the strong decline in GBP especially after BOE minutes showed a split of 6-3 in favor of keeping asset purchase flat. In this decision making session, Mervyn King only need to convince 2 more MPC members to switch side to force a push of additional 25 billion to the asset purchase facility (APF). However, the real issue is not just about the voting result, but how market reacts to such eventuality. If this scenario has already been priced in, it is possible that GBP/JPY may simply bounce back higher after a short decline, instead of going straight lower all the way. On the other hand, if the MPC keeps rates and APF as it is, we could see price rallying higher though if the overall sentiment remains bearish, closet bears may emerge to sell GBP at a better price.
It is hard to imagine GBP/JPY climbing higher as it will require both continued weakness in JPY and and unlikely scenario of GBP strengthening. JPY has failed to weaken further on today’s rate decision, while UK’s economic woes continue to pull the Sterling Pound lower, which is exactly the opposite of what we need for GBP/JPY to go higher.
BOE Rate Decision to be released at 7:00 am EST
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