Sterling Sell-off Grinds To a Halt on Strong Economy Growth

Technical Sentiment: Bearish

Key Takeaways

• Second Estimate GDP q/q came out at 0.8%, putting a temporary stop to the Sterling sell-off;
• GBP/JPY formed a double bottom around 170.65;
• A correction is all we can expect from GBP/JPY during the US session and early next week.

Recent price action shows traders are quick to draw their guns, price in the appropriate changes and holster immediately afterwards. GBP/JPY sell-off is now tamed and traders are looking for another consolidation period before the next explosive swing is triggered.

 

Technical Analysis

From a technical perspective the Sterling Pound remains pressured against its Yen counterpart, ready to close the 6^th consecutive week in the red. This recent double bottom formation, based on two identical lows at 170.65, currently lacks the volatility and price action confirmations to shake sellers out of the market. For this reason we maintain an overall bearish bias for GBP/JPY; however we will analyze both trading scenarios.

Bullish Scenario

While the double bottom pattern remains intact (GBP/JPY holds above 170.65), we cannot exclude the probability of a medium-term bottom in this area. Stochastic has declined well into oversold territory on the Daily time frame, at a minimum indicating that a consolidation is required before the next bearish swing. Despite the Lower Highs – Lower Lows swing configuration, the pair has yet to cross below the 200-Day Simple Moving Average. As a result, price is still trading in bullish territory and could traders could force a reversal with the proper fundamental triggers.

Above 171.24 traders will likely target 171.55/75, an intermediary Fibonacci cluster. Secondary target for the consolidation can be found at 172.45/55, a major Price Pivot Zone. A rally above the pivot zone will mark the transition from consolidation to a bullish bias, since GBP/JPY will invalidate the bearish configuration of Lower Highs, opening the way towards 173.15 and higher.

Bearish scenario

Besides the double bottom formation we can distinguish two perfect rejections off the resistance at 172.50. Only two short entries are favored in this situation: the first is a short position based on a third rejection off 172.50 (preferably confirmed with a bearish price action signal); the second entry is on a break below 171.65 and the 200-Day SMA (opening the way towards 169.52 in the process).

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Prepared by Alex Z., Chief Currency Strategist at Capital Trust Markets