The volatility dropped this past week in the financial markets in general and in the foreign exchange in particular. The main reason might be related to crucial events happened in the fundamental side of things. For one, the meaning of the FOMC meeting and rate decision cannot be underestimated. Therefore, the technical part of the analysis was influenced by monetary policy and currency traders were absorbing possible consequences of those changes. Nonetheless, we can make several conclusions about possible price action in the week ahead when looking at the charts. Today, I will focus on one of the most volatile currency pairs – GBP/JPY.

According to the weekly chart below, GBP/JPY is still in a long-term downtrend started in February this year. The bearish trade had several bullish swings that were nothing but technical corrections. Since the last one, the cross-rate lost more than 2,000 pips in 5 months, taking into account the lowest rate charted in early August. As a result, the pair breached support trendline, which used to hold weekly close rates since October 2017, but went back into the descending channel within six weeks after that. The main question is whether that bullish bounce was another correction and we should expect another downswing or does it have signs of a long-term reversal?

The technical picture is mixed as the MACD lines performed a bullish cross, while the histogram turned positive for the first time in 18 weeks. The previous week’s close was slightly above the 21-week exponential moving average. Those are bullish signals. However, the lack of further bullish development and the fact that RSI failed to breach the value of 50 suggests a bearish bias to renew the downtrend. What the bulls achieved last week was just a failed test of 136.00 handle, which used to support GBP/JPY in April 2017 during the bearish retracement. The rejection at this level is significant.

Another version of the weekly timeframe (see below) confirms the assumption that the recent bullish action was nothing more than a retracement. The nearest resistance comes together with Ichimoku Base Line (136.876 and descending), and it represents a strong barrier for the bulls. Perhaps overly optimistic bulls are looking for a continuation towards the bottom of the Cloud at around 140.00, only after breaking through the resistance by weekly close rates. On the other hand, the leading span is bearish. If GBP/JPY dropped below Conversion Line at 131.157, then the downtrend could be accelerated with a possible retest of the bottom at around the 127.00 handle. The range between resistance and support is quite large (more than 570 pips) thus a sideways consolidation is also possible for the nearest term as the lack of any significant breakthrough on either side would cause indecisiveness in the market.

The daily chart below is also mixed as GBP/JPY managed to get above the cloud and the leading span performed the bullish crossover. However, the momentum is weak. According to the Average Directional Index its mainline is below the threshold and headed south, while the surplus is positive but narrowing. Stochastic RSI is in the overbought zone, its lines had already crossed each other. Once the oscillator gets out of the overbought territory, a massive sell-off could begin, pushing the rate towards support range between 131.18 (Ichimoku Base Line) and 132.48 (the upper band of the cloud). The bulls would need to significantly add trading volume and momentum to defend that barrier.

As long as the GBP/JPY cross-rate consists of two major pairs, we should have a quick look at both of them to double-check our assumptions. GBP/USD bounced up to 78.6% Fibonacci Retracement level of the recent downtrend started in April 2018 but failed to breach it with the first attempt. The last weekly candlesticks also represent indecisiveness and weak momentum as the bulls were just unable to proceed with the buying pressure.

USD/JPY had tested the Ichimoku Base Line resistance at 108.43 (108.48 weekly high) but failed to continue the bullish retracement, printing a weekly loss of 0.49%. The Ichimoku Cloud has the same pattern as per GBP/JPY with a possible consolidation between Base Line and Conversion Line in the week ahead. However, traders should keep in mind that USD/JPY reflects the overall risk appetite in the financial markets, and if equity investors, especially in the U.S. were able to renew all-time highs of stock indices, then USD/JPY would surge, breaking several resistances and lifting GBP/JPY as the result. Therefore, there is an additional factor to analyse, which might overcome the technical outlook and change the sentiment.

Best wishes in the markets this week traders!

This post is contributed by MyFxLab. MyFXLab provides daily technical analysis written by professional traders. The site was founded by former Goldman Sachs FX traders and executives from some of the world’s largest brokers.

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