The driving theme in the forex market over the last 48 hours has no doubt been the ongoing drop in the British pound.
We’ve already covered the catalyst for the drop, as well as key levels to watch on GBP/USD, but it’s also worthwhile to check in on the more volatile GBP/JPY in the wake of the pound’s (CME:B6U14) bearish run.
From a fundamental perspective, both the pound and the yen (CME:J6U14) have had to navigate some disappointing economic data this week. We recently learned that Japan’s economy contracted by a harrowing 1.7% q/q in Q2 following the April 1 sales tax hike, while earnings in the UK are outright contracting. With the underlying economic picture in both countries deteriorating, technical developments may drive trade in the short term.
Looking to the GBP/JPY daily chart, rates have pulled back consistently since peaking above 175.00 in early July. While the pair has already broken its 50- and 100-day moving averages, rates have found a modicum of support off the 38.2% Fibonacci retracement of the February-June rally near 1.7100; the rising 200-day MA also comes in about 50-pips below that level at 1.7050.
While there may be a reason to expect a bounce from this floor, the price action is not cooperating thus far. The pair put in a large Bearish Engulfing Candle* yesterday, showing a strong shift from buying to selling pressure and foreshadowing a potential break of the current 1.7050-1.7100 support zone.
At the same time, both the MACD and RSI indicators are trending consistently lower and showing no signs of turning higher any time soon. As long as the MACD continues to trend down below its signal line and 0 and the RSI remains within its bearish channel, more downside will be favored in GBP/JPY.
If bears are able to overcome the 1.7050-1.7100 support area, a larger drop toward 169.60 (the 50% Fib retracement) or 168.25 (61.8% Fib retracement) could come into play. At this point, the bulls best hope is that rates will stabilize around this support level and eventually recover back above the 50- and 100-day MAs, but until that happens, sell trades will be en vogue.
*A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.