GBPJPY could be in for a strong rally, as a reversal pattern can be seen on its 1-hour time frame.

Price failed in its last two attempts to break below the 184.00 major psychological support and is testing the neckline resistance at the 186.00 handle.

An upside break from the neckline could confirm that an uptrend is in order, potentially taking price up by 200 pips or the same height as the chart formation. However if the neckline continues to keep gains in check, another move towards the bottoms could take place.

Stochastic has just reached the oversold area and turned higher, indicating a return in bullish momentum. Meanwhile, RSI is also starting to head north, which means that GBPJPY might follow suit. For now, the 100 SMA is below the 200 SMA so the path of least resistance is to the downside but an upward crossover seems possible.

Event risks for this trade setup include the PMI releases from the UK, as these serve as leading indicators for economic growth. Other factors affecting market sentiment favor further gains for the pound, as risk appetite is in play.

News that the IMF added the Chinese yuan to its SDR with its reserve currency status has allowed higher-yielders to regain ground. This is because the move might open up Chinese markets for more trading activity, lending positive growth prospects for the global economy. 

Only medium-tier reports are lined up from Japan next, although recent data has come in mixed. Retail sales indicated an upside surprise of 1.8% in gains while the preliminary industrial production fell short.

By Kate Curtis from Trader’s Way