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GBP/JPY: Market sentiment edgy; Brexit Article 50 trigger looms

Yesterday saw the US dollar manage to bounce back a little shortly after the New York open, while US stock indices filled their weekend gaps as they recovered from heavy losses. Perceived safe-haven gold eased off its highs but still closed higher on the day. Today, US index futures are currently pointing to a slightly weaker open, with European markets struggling to hold onto their earlier gains. So, there seems to be some stability in the markets at the time of this writing. But the lack of any major news or other fundamental events, there’s little or no reason for the on-going ‘risk-off’ mood to turn decisively positive. Thus, equities could fall back later on today or this week, even if technically the markets look more stable. Put another way, safe haven assets like gold and Japanese yen may remain underpinned.

Meanwhile in the UK, Prime Minister Theresa May will trigger Brexit Article 50 on Wednesday. The news is already priced in which means it probably won’t have much of an impact on UK markets. Fundamentally, the pound could remain undermined by Brexit-related economic concerns for a long time. Well, at least until there’s some clarity in terms of trade deals between the UK and her largest trading partners, and Scotland’s future.  However, the recent sharp rise in inflation means the Bank of England is slowly turning hawkish and the prospects of further rate cuts are diminishing and odds for rate rises increase. This is what has helped to support the pound somewhat in recent times and may limit its downside in the near future.

In the likely event that safe haven assets remain bid and Brexit concerns come back to the forefront, then the GBP/JPY may come under increased pressure in the second half of the week. Technically, the GBP/JPY is in consolidation mode currently as it resides between two converging trend lines. But with the other JPY pairs recently breaking down, the GBP/JPY could be next. Indeed, if support at 138.00 gives way then this may pave the way for a potential drop to 131.65-132.75 area, which was previously resistance and converges with the 61.8% Fibonacci level. Conversely, if the resistance trend line breaks and price confirms the breakout with a move above the last notable resistance level at 140.55, then this may pave the way for a rally towards 144.80 resistance or the top of the December high at 148.45. 

Source: eSignal and FOREX.com

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