GBP/JPY Breaks Out of a Volatility Squeeze to the Downside

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GBP/JPY Breaks Out of a Volatility Squeeze to the Downside

Consolidation after New High on the Year:
In September GBP/JPY made a fresh high on the year at 180.70, after which it retreated to a low of 176.64 last week. Since then it has been consolidating between the 176.64 low and the 178.73 resistance.

GBP/JPY 1H Chart 10/1
gbpjpy 1h chart 10/1

(click to enlarge)

Low Volatility 
We can see that in the past week, volatility has died out and price was oscillating between 177.50 and 178. The 200-, 100-, and 50-hour simple moving averages (SMAs) converged around 177.75. The 1H RSI was swinging between 40 and 60.

Volatility Breakout
Today, during the 10/1 European-US session, we are finally seeing some volatility, as price fell from 178 and cracked the 177.00 handle. Price looks poised to test the 176.63 support pivot.  The 1H RSI has fallen below 30 again showing bearish momentum in this time-frame.

Bearish Break:
Now, if price can extend below 176.60, we have another bearish correction swing materializing. The 175.36 level is a previous resistance pivot, and could be a support factor against the current dip. We can see this in the daily chart below.

Bullish Continuation Scenario
Otherwise, if price pops up above 178, the GBP/JPY is still in consolidation, and will have a bullish bias because the prevailing trend is bullish.

Bearish Correction Scenario:
A break above 178.75 should revive the prevailing bullish trend, with the 180.70 high on the year in site, and with the possibility of further upside. The daily chart shows the market in a bullish push in September bringing back momentum and the bullish bias. At this point, 175.36 could be a support pivot as well as the 174.00 pivot area, down to the 50-day and 100-day SMAs around 173.15 to 173.50. A break below 172.00 however would clear below all the SMAs, and should signal a major consolidation, or bearish correction against the 2012 to 2014 uptrend, especially if the daily RSI also falls back below 40.

GBP/JPY Daily Chart 10/1
gbpjpy daily chart 10/1

(click to enlarge)

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.