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- GBP/JPY recovery at risk of running out of steam.

- Period of consolidation likely before next up move.

- JPY to be driven by risk appetites and trade war.

The GBP/JPY rate was trading lower Tuesday after gaining almost three percent last week and studies of the charts suggest a risk of a deeper pullback in the short-term because the recent recovery may have took the pair too far, too fast.

The 4 hour chart - used to determine the short-term outlook, which includes the coming week or next 5 days - shows the pair stalling after the strong rally that began at the October 10 lows.

The exchange rate is at risk of pulling back and trading in a range after hitting a key price objective generated by a ‘measured move’ price pattern, which is visible on the daily chart below.

Another bearish factor is divergence between prices, which are rising or going sideways, and momentum that is falling when measured by the relative-strength-index (RSI). Any pullback is likely to be shallow because of support from large moving averages (MA) in the 1.38-to-139 area.

Despite warning signs of weakness, the established trend is bullish and this predisposes the exchange rate to making further gains, conditional upon a break to a new high. A move above the 141.50 October 17 high would open the way to a continuation up to the trendline of the wedge at 144.50.

Above: GBP/JPY rate shown at hourly intervals.

The daily chart below shows the ‘measured move’, or ABCD pattern, which tend to have first (A-B) and third legs (C-D) of the same length as is the case with the GBP/JPY rate currently. That suggests the pattern is finished.

If this is so then it also increases the possibility of a pullback and some sideways movement. However, and after a period of consolidation, the chances are the uptrend will continue and take the market to 144.50 and the trendline.

A clear break above the trendline, marked by a break above 145.50, would probably further result in a continuation up to 147.00. The daily chart is used to give an indication of the outlook n the medium-term, which is the month ahead.

Above: GBP/JPY rate shown at daily intervals.

The weekly chart shows the pair rising in a broader wedge pattern after completing the ‘measured move’ and rising above the 50-week MA.

The pair has come a long way quite quickly and a pause followed by sideways consolidation is now favoured while bulls take profits on their positions and analysts reassess the outlook.

A break above the wedge pattern would be a very bullish sign for the pair and suggest a move up to at least 155.0 initially. The weekly chart is used to give us an indication of the outlook for the long-term, defined as the next few months.

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Above: GBP/JPY rate shown at weekly intervals.

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The Japanese Yen: What to Watch

The main risk factors for the Yen, therefore, are events which are likely to impact investor sentiment such as U.S.-China trade risks and the outcome of Brexit. These factors are actually suggesting a more optimistic outlook than had been thought before, which is likely to be negative for the Yen.

“The prospect of a Brexit agreement and the possibility that the worst is over in terms of the trade war continue to see improvement in risk appetite, with our index moving above the 60% mark to a risk-loving setting,” says Jason Wong, an analyst at BNZ Bank.

U.S-China trade talks are still on track for the signing of a deal sometime in mid-November according to recent commentary.

Recent comments from Robert Lighthizer, the U.S. Trade Representative, were promising after he indicated a final agreement might be ready for signing at the APEC meeting in Chile on November 16-17.

Likewise, U.S. President Donald Trump, was positive about easing relations after he said yesterday that China has “started the buying” of US farm products” and he added “I want more”.

He also repeated that “The deal with China’s coming along very well. They want to make a deal… They sort of have to make a deal … because their supply chain is going down the tubes.”

Brexit risks have eased and a deal is now quite possible, further reducing and likely to reduce in the future supportive safety flows into the Yen.

Johnson’s deal still needs to get the approval of parliament but even if it fails the alternatives - a general election or a referendum are also both outcomes which markets regard as relatively benign. Effectively its a win-win for risk.

The worst case scenario of a ‘no-deal’ Brexit now seems virtually impossible. The next key test will be Parliament’s vote on the deal scheduled for 19.00 GMT on Tuesday evening. If it fails it will be ‘dead in the water’, according to experts; but likewise there is a chance it could also win.

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