GBP/USD, GBP/JPY look set to extend their bounce (to various degrees)

See my longer-term views on AUD/JPY and EUR/JPY

The key concern for the Bank of England (BOE) when they delivered their 25bp cut to 4.5% last week was “inflation persistence”. While this may have stuck a spanner in the works for those seeking a more dovish outcome, two members voted for a 50bp cut compared with the seven that opted for the 25. That alone should tell you all you need to know about just how concerned the BOE really are about an expected spike in inflation. I doubt it will derail their easing cycle.

Besides, the “higher energy costs and regulated price changes” referenced in the BOE minutes, which are expected to push headline inflation up to 3.7% in Q3, are likely to weigh on demand. So to a degree could be seen as disinflationary. Furthermore, the BOE stated in their minutes that the rise is not expect to trigger a second round of inflation. The market Participants Survey (MaPS) had a median of 11bp of cuts this year, which leaves room for another 75bp of cuts.

All in all, I suspect more cuts are coming and we could be looking at a weaker British pound, but it will be susceptible to bounces along the way. In fact, we’re seeing such a bounce on GBP/JPY in light of yen weakness, and GBP/USD is squatting up to 1.25 – a key line in the sand for bulls and bears. Out of the two, GBP/USD appears to have greater upside potential over GBP/JPY from a technical perspective.

GBP/USD technical analysis

I suspect GBP/USD is now within an ABC correction higher, against its near 10% drop from the September high to January low. The selloff stalled at the 1.21 handle, just 62 pips above 1.21, and a strong rebound marked the completion of a 3-week bullish reversal pattern (morning star).

A 100% projection of the length of wave ‘a’ from the low of wave ‘b’ sits just beneath the December VPOC (volume point of control) at 1.2692. And that could be an initial target for bulls chasing a potential wave C. But if the US dollar begins to truly weaken or incoming UK data points to stronger inflation, bulls could target 1.28 for wave ‘c’ given a 138.2% projection sits just above the December high at 1.2811.

The daily chart shows a prominent bullish engulfing candle formed on Tuesday. If the analysis is correct, prices should hold above Tuesday’s low. Bulls could seek dips within Tuesday’s range and seek an initial move to 1.25. but take note that this level has proven to be pivotal since November, so it may cause a pullback at a minimum. A daily close above 1.25 brings the December value area low (VAH) at 1.2588 into focus ahead of the 1.2692 VPOC.

GBP/JPY technical analysis

While GBP/JPY saw a daily close beneath the December low on Friday, the breakout distance lacked bearish conviction along with Monday’s doji. Tuesday’s strong rally deems the original breakdown as a bear trap, and completes the 3-day bullish reversal pattern (morning star). Prices have continued higher today in Asia, with the impulse nature of the 1-hour rally with minimal pullbacks suggesting further gains over the near term.

A move up to 193 seems plausible on the daily chart, which sits just beneath the February high and monthly pivot point. However, note the resistance cluster below 192 comprising of the weekly R1 pivot (191.57) and last Wednesday’s high (191.84) that could provide act as a bump in the bullish road and prompt a pullback. But given the strength of the dally, bulls could seek dips above the weekly pivot point (189.32) in anticipation of an eventual move up to 193.

As noted in prior analysis, my longer-term view is bearish for GBP/JPY on the weekly chart and my near-term bullish bias is simply seeking a countertrend move following its false break of the December low.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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