The four-hour chart of the pound sterling against the yen (GBPJPY) shows clearly the strong upward movement earlier this month. The pound’s gains came on positive fundamentals. Many had expected the UK’s parliament to agree to the Prime Minister’s latest deal with the EU for Brexit.
The trend on this timeframe has appeared to be fairly healthy. It has featured a number of consolidations in between the strong gains in the first half of October. Low support here is around 127, the latest lows on the daily charts. Price bounced strongly from this area in early September. High resistance is less clear given the conditions of a strong upward trend. However, the area of 141.40, tested twice since last Thursday, might be important.
The typical combination of 20 (from Bands), 50, 100 and 200-period simple moving averages suggests a fairly strong buy signal. Price has now moved below the 20 SMA. On the other hand, it remains above the other three, significantly so in the case of the slower lines. The double golden cross of the 50 SMA over the 100 and 200 early last week presaged ongoing gains into Monday.
Support from MAs probably comes most immediately from the 50-period, especially because this overlaps with the 23.6% Fibonacci retracement area. Bollinger Bands (20, 0, 2) have contracted since last week. This suggests that volatility is likely to remain comparatively lower over the next few days. The lower deviation also seems to confirm the importance of 139 as a support.
Meanwhile the main line of the slow stochastic (15, 5, 5) has moved clearly into the oversold area as of this morning. Given the overall conditions, an upward crossover of the stochastic in oversold over the next few periods would be a strong buy signal. Conversely, MACD (12, 30, 9) suggests somewhat stronger momentum downward, with the histogram accelerating away from the signal line since yesterday.
Fundamental drivers of the pound over the past few weeks have understandably made price action somewhat confused recently. However, the mostly smaller bodies of this week’s candles seem to suggest that this trend is entering a phase of consolidation rather than significant retracement or reversal. One can also point to the obtuse angle of the current consolidating movement. Completion of the current period as a shooting star might suggest more losses; however, traders would be ill-advised to act before this candle’s close.
Fibonacci retracement comes from the latest large upward movement and the extension this movement plus the current consolidation. Given the presence of the lower deviation of Bands and the 50 SMA in the same area, the 23.6% retracement is probably the most important area in the immediate future. This support is likely to resist some testing. Conversely, a close below it might suggest a longer downward movement. For now at least, the 61.8% extension around 146 is an unrealistic target.
Traders of the pound might forgive themselves for taking a break from their charts this week to watch BBC World’s coverage outside the Palace of Westminster. Events in the House of Commons have been rather more dramatic than usual since Saturday, with the Conservative government relying on other parties’ rebel MPs in that House to approve Mr Johnson’s Brexit deal. Despite this, the rejection of the Prime Minister’s timetable last night though almost certainly means that Brexit will be delayed until the end of January at the earliest.
There is probably more room for the pound to strengthen here. The technical view overall supports the idea that the current move down by the pound is a consolidation. Nonetheless, it would be very foolish for traders to ignore news of Brexit from Parliament. A sudden change in the government’s plans might well change the picture on charts entirely.
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