GBP/JPY: Double top may spell double trouble

As the sun rises a hump day in the US, traders are ramping up for a busy final 48 hours of economic data. Earlier this morning, payroll provider ADP released its estimate of the August non-farm employment change, with the widely-watched leading indicator for NFP coming in at 190k, slightly below the 200k reading expected. In another mosquito-bite-sized annoyance for dollar bulls, the July ADP employment report was revised lower by 8k jobs, leaving the measure at 177k.

Perhaps more significantly, a separate report on productivity from the BLS showed that “unit labor costs” (essentially a measure of employee wages) fell 1.4% in Q2, suggesting that aggregate earnings remain in the dumps. For a Federal Reserve that’s desperate for any signs of price pressure in the US economy so that it can hike interest rates later this month, this morning’s reports represent a setback. Moving forward, traders will hone in on today’s ISM Services PMI reading, which needs to show strong growth after the disappointing Manufacturing PMI report earlier this week. Finally, Friday’s NFP report will go a long way toward shaping interest rate expectations for the Fed, with a 220k headline reading and 0.2% m/m growth in average hourly earnings expected.

Technical View: GBP/JPY

While this week’s US data doesn’t have a massive direct influence on GBP/JPY, the pair is still a good barometer of risk sentiment in the market and should react to changes in traders’ risk appetite. GBP/JPY has clearly taken a turn for the worse over the last few weeks, with rates falling by over 1200 pips from the recent peak above 195.00 at one point yesterday. Yesterday, the unit closed below its 200-day MA for the first time since April; more significantly, the close below previous support at 185.00 confirms a longer-term double top pattern at 195.50, suggesting that the pair may have much further to fall in the weeks to come.

In the short-term, there is a case for a brief bounce, with the unit testing the 61.8% Fibonacci retracement of the Q2 rally at 182.90 and the RSI in oversold territory, but the 200-day MA and previous support level at 185.00 could now provide resistance moving forward. Meanwhile, a close below that support level could open the door for an eventual move down to the 78.6% Fibonacci retracement at 179.35 or even the year-to-date low (and double top pattern’s measured move objective) near 175.00.