The initial surge of the Pound Sterling against the Japanese Yen, spurred by political optimism after the Labour Party victory, has met resistance as the landscape shifts. The high point reached in July now seems distant, with economic policy shifts and geopolitical uncertainties driving it downward. This change in momentum is reflected in a bearish pattern known as a failure swing, suggesting a deeper underlying pressure. As technical indicators point to a potential decline, the market stands at a crossroads, with the future direction hinging on the delicate balance between resilience and vulnerability.
Overview
The initial surge of the Pound Sterling against the Japanese Yen, spurred by political optimism after the Labour Party victory, has met resistance as the landscape shifts. The high point reached in July now seems distant, with economic policy shifts and geopolitical uncertainties driving it downward. This change in momentum is reflected in a bearish pattern known as a failure swing, suggesting a deeper underlying pressure. As technical indicators point to a potential decline, the market stands at a crossroads, with the future direction hinging on the delicate balance between resilience and vulnerability.
Key Economic Events
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Technical Analysis
The exchange rate between the Pound Sterling and the Japanese Yen peaked in July, reaching 208.110 after the Labour Party's electoral victory. However, the "honeymoon period" was interrupted by the Bank of England's rate cut and persistent geopolitical tensions, which have left the Pound Sterling vulnerable.
The decline was triggered by a bearish reversal pattern called a failure swing in technical analysis. Specifically, the price peak at 199.472 did not surpass the previous peak, and the price fell below the trough at 195.8554, resulting in a failure swing. Both the 50-period Exponential Moving Average (EMA) and the Momentum oscillator indicate a downtrend, with prices below the EMA and values below the 100 baseline. However, the Relative Strength Index (RSI) shows mixed signals as it has risen above the 30 line, indicating weakness in the bearish momentum and a potential upward rally.
Potential Upside Targets
If the bulls take control of the market, traders may consider the following four potential upside targets:
190.833: The first price target is 190.833, which aligns with the 38.2% Fibonacci Retracement between the peak at 208.110 and the trough at 180.093.
195.854: The second price target is estimated at 195.854, representing the trough of the failure swing marked on July 25.
199.472: An additional resistance level is set at 199.472, corresponding to the peak of the failure swing reversal recorded on July 30.
208.110: The fourth resistance is determined at 208.110, representing the highest exchange rate between the Pound Sterling and the Japanese Yen in 2024.
Potential Downside Targets
If the bears manage to maintain control of the market, traders may find potential opportunities in the following four downside targets:
184.146: The initial level of support is identified at 184.146, corresponding to the 423.6% Fibonacci Extension of the bearish failure swing.
180.093: The second downside target is expected to be 180.093, which corresponds to a daily low marked on July 5.
171.450: The third line of support is estimated at 171.450, which aligns with the (S3) support calculated by using the weekly Pivot Points method.
176.305: An additional support level is estimated at 176.305, reflecting a trough on the weekly timeframe.
Fundamentals
The surge of the sterling, which began after the Labour Party's electoral victory, has lost steam due to the Bank of England's rate cut and global market instability. The pound has fallen by over 9% since reaching 207.707 in July. Investor confidence has waned because of political turmoil in the UK, including anti-immigration demonstrations and potential tax increases. Additionally, the sterling has weakened further due to global market shifts, particularly after Japan's rate hike.
Conclusion
The Pound Sterling's initial rally against the Japanese Yen, fueled by post-election optimism, has faltered under the weight of shifting economic policies and geopolitical tensions. The emergence of a bearish failure swing pattern underscores the growing vulnerability of the currency, leaving traders to navigate a complex and uncertain landscape. With technical indicators signaling a potential downtrend, the market's next moves will be crucial in determining whether the pound can regain its footing or if it will continue its descent.