GBPJPY Long-Term Triangle (May 5, 2015)

A descending triangle chart pattern appears to be forming, as the pair is currently testing the top of the formation. If this area holds as resistance, the pair could head back to the triangle support once more.

Stochastic is moving down from the overbought region, confirming that sellers are taking control. However, the short-term exponential moving average seems to be crossing above the long-term EMA, suggesting that further gains are still possible. In that case, GBPJPY could be able to break past the triangle resistance at the 182.00 major psychological level.

An upside break could lead to as much as a thousand pips in gains for the pair, as this is approximately the same height as the triangle chart formation. Similarly, a downside break from support could spark a 1,000-pip selloff.

The path of least resistance is to the downside, as data from the UK economy has been mostly disappointing. Just last week, the manufacturing PMI reading fell short of expectations, contrary to the BOE’s assessment that the economy is on its way to recovery.

On the other hand, the latest set of inflation reports from Japan indicated some improvements. The national core CPI climbed from 2.0% to 2.2%, supporting the BOJ’s claims that price levels are ready to resume their climb and possibly reach their target CPI of 2% by next year. This also underscores Governor Kuroda’s statement saying that policymakers are discussing the technical details of an exit strategy, with one member already voting to taper their monthly bond purchases.

Event risks for this setup this week include the UK services and construction PMI, along with the upcoming elections. A coalition government is expected and this might spark more pound weakness in the longer-run.

By Kate Curtis from Trader's Way