GBPJPY Retracement Setup (Jan 21, 2016)

Price just broke below an area of interest at 166.50 then dipped to a low of 164.00 before pulling back. 

Using the Fib tool on the latest swing high and low shows that the 50% level lines up with the area of interest while the 61.8% level coincides with the descending trend line and 100 SMA. These could serve as potential resistance areas if the downtrend would resume at some point. 

Stochastic is already indicating overbought conditions with a slight bearish divergence while RSI is nearing the overbought area. Once these oscillators turn lower, bearish pressure could build up and possibly even push for a break of the previous lows. The shorter-term 100 SMA is below the longer-term 200 SMA so the path of least resistance is to the downside. 

Event risks for this trade setup include the UK retail sales release on Friday, as analysts are expecting to see a 0.1% decline in consumer spending. Based on the latest employment report, wage growth was absent since the average earnings index slumped from 2.4% to 2.1% even though hiring picked up.  

Earlier in the week, UK inflation numbers came in stronger than expected but this was overshadowed by BOE Governor Carney's downbeat speech. He pointed out that the UK central bank has no plans of tightening monetary policy anytime soon and that the slowdown in China poses risks to the global economy. 

As for the Japanese yen, talks of further easing spurred risk aversion yesterday, allowing the lower-yielding currency to rally. The all industries activity index is up for release today and a 0.7% drop is eyed. 

By Kate Curtis from Trader's Way