By far the strongest major currency on Wednesday was the British pound, which actually overtook the Canadian dollar to become the best performing major currency year-to-date.
Who would have thought this would happen at the beginning of the year? Well, the pound has stormed back to life in recent months owing to growing optimism that the Brexit stalemate could finally end. That’s because opinion polls point to a majority win for Prime Minister Boris Johnson’s Conservatives Party. If the polls are to be trusted and they do end up winning, the Tories will have enough seats to pass the Brexit bill through parliament and officially exit the EU on 31st January.
At last, there will be some certainty, even if the real work will then start: trade negotiations. However, if the polls get this wrong again and Conservatives fail to win majority then a lot could go wrong for the pound. For now, though, the markets are trusting the polls and the pound dips are being bought.
Yen undermined by return of risk appetite
Among the pound crosses to watch, the GBP/JPY is catching my attention. Not only has this pair been boosted by the rebounding sterling, but also by improved appetite towards risk which has weighed on safe haven yen and gold. Unless Labour manages to sharply close the gap with the Conservatives or sentiment towards risk takes a big U-turn, the GBP/JPY stands ready to gain further ground as the elections nears.
GBP/JPY resolves consolidation by breaking out
Technically, GBP/JPY’s lengthily consolidation since mid-October has finally been resolved today with the bulls once again coming out on top. The Guppy has finally broken above the 1.5 month-old consolidation range, potentially paving the way for the resumption of the bullish trend that has been in place since rates double bottomed in early September.
With the recent resistance area around 141.80 broken cleanly today, any future retreat back to this area could be defended by the bulls. There is also a shorter term support seen around the 142.00 handle.
Levels where things could potentially go wrong for GBP/JPY bulls
On the upside, a potential resistance level or bullish target to watch is around 143.80, a level which was formerly support. Here, there is also a long-term bearish trend line coming into play. This trend line is derived from connecting the previous significant high in February 2018 with the March 2019 peak, and extending the projected line into the future.
Meanwhile, if the above mentioned 141.80-142.00 support range fails to hold on a potential pullback, then there is a risk we may see a trend reversal — at least in the short-term. Indeed, the short-term bullish outlook would become completely invalidated should rates break back below today’s low around 141.84, for this would mean a failed breakout attempt. If that were to happen then the bears may target liquidity that would be resting below the aforementioned range, sub 139.30 area.
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