GBP/JPY Looks Vulnerable With Its Gap To A 4-week Low

The British pound finds itself on the back foot following a breakdown in Brexit talks over the weekend. Having gapped broadly lower, GBP/JPY shorts could be tempting given the risk-off environment that’s currently favouring the yen. 

Having spent four weeks confined to a 280-pip range, we were originally looking for this to break higher in line with bullish momentum from the August low (139.90). Obviously, those plans have been scrapped with the pick-up of bearish momentum and clear break lower.

Taking a closer look at the daily chart we can see the range produced several bearish reversal patterns near the highs, including three bearish outside days and two bearish hammers. Furthermore, today’s gap lower has broken out of a four-week range with a break of the 146.95 low. Assuming a run towards the 145.69/93 highs this leaves a potential 100-pip drop on the cards from current levels.

We’ll keep a close eye on 147.17 as a decisive break above it takes us back into range to warn of a bear-trap. Today has come close to ‘closing the gap’ but could also go on to serve as an intraday swing high for bearish bets. And, if losses are to resume, watch the higher timeframes as a break below 146.32 confirms a bearish hammer on the weekly chart.

We can see on the weekly chart that GBP/JPY has struggled at the highs, having produced a bearish hammer and bearish engulfing candle over the past four weeks. So, if this does turn out to be the beginning of an important inflection point, a return to 139.90 is not out of the question.

Keep in mind this could be a volatile week for GBP crosses with CPI on Wednesday and any updates on Brexit ahead of Thursday’s EU summit.