GBP/JPY weekly fundamental and technical update

Fundamental Analysis:

The tensions between the UK and the EU continue to rise, reaching a new level of intensity as Prime Minister Boris Johnson threatens to suspend parts of the Brexit deal if the EU does not accept the UK's demand on the topic of Northern Ireland. For many businesses, consumers, and investors, this level of intensity is bringing a new wave of market uncertainty, especially as the fear due to increasing COVID-19 cases is increasing in the UK.

The two parties struggle to find an optimal equilibrium for their post-Brexit relationship, which is evident from the market uncertainty from investors between risk assets and safe-haven commodities. Similar to the past, Britain is yet once again receiving a final warning from the European Union to oblige its commitments made under the Northern Ireland Protocol, or the European Commission will file a reasoned opinion, stating the UK's breach of the protocol by the end of the month. Despite the conversation between PM Johnson and EU President Von der Leyen, the two parties failed to reach a mutual agreement on the renegotiation of the aforementioned protocol. Britain's minister for EU affairs, David Frost, has suggested triggering Article 16 of the protocol in the event of no resolution. Furthermore, the UK or the EU can suspend components of the agreement, should they create serious problems for one party. 

In addition to the Brexit tensions, the UK is enduring a mass staff shortage in many of the key areas of the economy despite reopening on Monday without any federal restrictions. Moreover, as the COVID-19 cases increase, many workers continue to fear working in sectors such as public transportation, public-facing supply chain, and alike. Hence, the UK government is providing daily COVID-19 tests to help the vaccinated workers avoid the 10-day isolation requirement should they contact a COVID-positive individual. 

 

Technical Analysis:

GBP/JPY has cleared above a previous consolidation and support level, now approaching a key zone that will determine the test of the bearish structure on the Daily timeframe. On the 4 hour timeframe, there are clear signs of exhaustion as the price rejects the 152 level with top wicks and the low-volume candle closes. The questions to ask at such levels, wicks, and candles as investors or traders are:

• Will price create a resistance in the 152 zone (lower high) and continue down, respecting the Daily timeframe bearish structure?
• Is the market simply collecting orders to push past the 152 level, which would indicate a break of the bearish structure?

To find the optimal entries and trades, investors and traders must align fundamentals with technical analysis.