Technical Sentiment: Bearish

Key Takeaways

• U.K. CPI falls to 1.6% vs. forecast of 1.8%;
• Producer Price Inflation at -1.6% vs. -1.0%;
• Core CPI, House Price Index and Producer Price Index were all below the consensus.

Sterling sold-off during the European session on weaker than expected U.K. data. Cable pierced the 200-Day Moving Average and GBP/JPY is expected to follow suit in the next trading sessions, as soon as traders erode the stop losses below 170.40.

Technical Analysis

Last week we saw GBP/JPY form a strong bottom around 170.65 (61.8% Fibonacci retracement from 167.75 to 175.34) and a fake breakout that ended in a bounce once the 200-Day Simple Moving Average was touched. The pair then rallied up to 171.55/75, an intermediary Fibonacci cluster, only to form a Lower High and crash back down to the support on today’s disappointing U.K. data.

GBP/JPY is currently trading at 170.8 after testing support at 170.65 for the 4^th time this month. Despite having such a strong base in this area, strengthened by the 200-Day Simple Moving Average and with increasing oversold conditions as indicated by Stochastic on the Daily time frame, going long in this area does not make any sense right now.

A 4H bar close below 170.60 should trigger stop losses accumulated below the base, while a continuation below 170.40 will confirm the overall desire to remain bearish in the days to come. Breaking below the 200-Day SMA will put the pair in a confirmed downtrend on the Daily time frame. Traders will immediately look to test 169.51, major support line from April and May 2014; with a medium term target around 167.75.

A bullish scenario will begin to form above 171.66, after price action invalidates this swing configuration of Lower Highs. Above 171.66 is the best stop loss location for existing short positions, due to a range-consolidation market personality between 170.65 and 171.66.

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