GBP/JPY has made an about face since making a low on the year at 174.87 in mid-April. Then, in just a month, it erased the past 4 months of bearish action and is now at new highs on the year.
In the daily chart we can see that the rally has been essentially one swing, other than the brief pullback that tested a broken trendline as support. Then the second leg of the swing pivoted from 181 and is now approaching the 2014-high at 189.71. At this point, the 184-185 area might become a key support if the market pulls back.
Fundamental Backdrop: BoE vs. BoJ
With the BoE showing optimism despite a weak Q1, the market is expecting it to become more hawkish throughout the year. The Bank of Japan has not given us any reason to believe it will be winding down its stimulus measures any time soon. It did say it was not planning to expand the quantitative qualitative easing program, so its not going to be more dovish. However, with the BoE shifting stance, the GBP is likely to strengthen against the JPY.
With the current technical picture aligned with the fundamental backdrop, we should expect GBP/JPY to threaten the 2014-high. After all, when you jump out to the weekly chart, you can see that the prevailing trend since 2012 is still in play.
1) Price is still above all 3 of the 200-, 100-, and 50-week SMAs.
2) The SMAs are sloping up and in bullish alignment.
3) The RSI held above 40 after being able to tag above 70 every year. Don’t be surprised if it climbs above 70 again in 2015, which would likely correspond to a break above the 2014-high.
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