GBP/JPY Testing Major Support Level
The British pound fell a bit during the trading session again on Wednesday against the Japanese yen, as we approach the ¥135 level. This is a major round figure so of course it will attract a lot of attention. The level has created a bit of a pushback just a couple of weeks ago, but now that we approach it again, one has to wonder how much longer can the support hold?
Continuation of Downtrend
The continuation of the downtrend makes quite a bit of sense considering that the Brexit is still a major issue and creating a lot of uncertainty. Quite frankly, the ¥135 level being a round figure is probably the only reason this market has stopped from falling recently. However, it is only a matter of time before we break down below there, considering the strength of the downtrend that we have seen lately. Beyond that, there is a huge confluence of events that come into play, pushing this pair lower.
Various Fundamental Issues
As I mentioned previously, the Brexit is going to be an issue going forward, because quite frankly the British don’t look anywhere closer to solving the issue than they did six months ago. That puts a lot of doubt into the British pound, so by extension at the very best, this pair will rise but underperform other yen related pairs. However, there are other things out there that are driving this pair lower.
The loosening of central bank policy around the world of course means that the British are probably not going to see any type of tightening anytime soon, leave alone the idea of the Brexit causing so much uncertainty. Beyond that, the geopolitical issues between the Americans and the Chinese haven’t gotten any better, and that will drive money into the Japanese yen as it is considered to be a “safety currency.”
Further driving this pair lower is the fact that there seems to be a severe lack of global growth, and even the Americans are starting to show signs of weakness. If that’s going to be the case then it makes quite a bit of sense that safety currency trading gets back into vogue.
The Trade Going Forward
The trade going forward is undoubtedly to short this pair. We may get a little bit of a bounce from the ¥135 level, but there is now an obvious barrier at ¥138, so any attempt to get back that level that shows signs of exhaustion will be jumped upon by longer-term traders. Beyond that, if we were to break down below the ¥135 level for more than an hour, is very likely that the sellers will continue to go down to those levels and push the British pound down to the ¥131.50 level, effectively wiping out the entire rally. The 61.8% Fibonacci retracement level being broken a couple of weeks ago quite often is a sign that the entirety of the rally is to be given up. At this point, there is no reason to think this market is ready to turn around.