The British pound is set for move volatility against the Japanese yen currency as the Bank of England potentially starts to raise rates next month, while the Bank of Japan talked down rates and inflation during their recent monetary policy meeting.
Weakness in the British pound currency has been weighing on the GBPJPY pair this week, due to risk-off trading sentiment, and demand for the safe haven currency of choice, the Japanese yen.
However, weakness should not last for long, as the clear divergence between the Bank of Japan and the Bank of England could cause a clear rate differential trade, also known as the carry trade for the GBPJPY pair.
With the United Kingdom economy showing strong signs of rising inflationary pressures, as highlighted by the recent September CPI report, and rising energy prices, the differentials between both economies are becoming too hard for traders to ignore.
I believe with the fundamentals of these economies are diverging in a big way, and buying the GBPJPY at bargain levels, i.e. current trading levels could be a great play from now into year-end.
The ActivTrader Market Sentiment tool shows that some 84 percent of traders are bearish towards the GBPJPY pair right now. This goes strongly against the fundamentals, so do bare this in mind.
However, bearish sentiment does bode well for more gains in the GBPJPY pair as historical data has shown that fading one-sentiment skews amongst the retail crowd has proved to be lucrative.
GBPJPY Short-Term Technical Analysis
The four-hour time frame shows that the GBPJPY pair has formed a massive descending broadening expanding wedge pattern, which are amongst the most bullish patterns.
According to the size of the pattern, the wedge is located between the 154.50 to 157.40 price levels. Any dips towards the bottom of the wedge or 155.00 area could be a major buying opportunity. Overall, I expect a 300-point breakout at least once the pattern is broken.
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GBPJPY Medium-Term Technical Analysis
Looking at the daily time chart shows that the GBPJPY pair has invalidated a large head and shoulders pattern. The chart actually looks very similar to the CADJPY chart.
Buyers have repeatedly held the price above the top of the mentioned head and shoulders pattern. Interestingly, if bulls can hold the price above the 155.00 level then a powerful rally towards the 160.00 level should be expected.
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