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Breakout traders waiting for continued upside in the GBPJPY

The pound is benefitting from the tighter monetary policy by the Bank of England. If the UK can get past the Omicron variant of concern and get back to work, there is a real chance that 2022 is the year in which we see the pound strength back above the pre-Brexit highs.

Forex Analysis

This year, the GBP has been one of the best-performing major currencies. The pound has gained 1.28% and 1.35% against the New Zealand dollar and Australian dollar this last week alone. Recent upbeat UK data could help explain the GBP's strength since both the manufacturing PMI for December and the mortgage lending data for November beat expectations. By combining an aggressive booster jab roll-out with minimal pandemic restrictions over the Christmas period, the government has been able to prove so far that the omicron variant appears to be less lethal, which confirms its strategy to help the economy endure the Covid storm with Plan B.

According to the ‘flash’ survey estimate last month, the final reading of the UK services PMI for December was expected to confirm a sharp moderation. The headline measure of the survey dropped to 53.2 from November’s reading of 58.5 to record its lowest level since February of last year. Today's actual reading came in slightly higher than expected at 53.6. Today's report wasn't a "good news" read by any means. The service sector output growth fell to a ten-month low with Omicron firmly to blame. The Omicron variant and the government's warnings led to a steep fall in spending on face-to-face consumer services, escalating business disruptions due to staff absences.

If the pound rises further without further monetary policy adjustments from the Bank of England, it could be that many of the potential positives are soon to be baked into the price. Business activity expectations for the year ahead reflect upbeat employment growth across the service economy into 2021 and if we see a turnaround in the next set of services data reports, the Bank of England may have more confidence in the rate hike cycle and follow the Fed, thus pushing the pound higher again.

Looking at the daily chart of the GBPJPY the rise in the pound against the yen over December was very bullish post the 15bps rate hike. Having breached through a potential level of supply and stopping out anyone short from when the Bank of England disappointed the markets by holding rates at 0.10%, that level of resistance and supply has been flipped to support and demand. Today’s backfill and test of the 156.20 level is currently confirming the support and looking for a long trade is possibly the best cause of action today.

The ActivTrader sentiment indicator shows that the majority of traders on the platform trading the pound versus the yen are extremely short. This is another reason why I would be looking for longs this week.

On an intraday chart, the GBPJPY tested below the overnight session range lows and dipped into that November supply now turned resistance level. For traders looking to buy the dip, the close back inside the range was the first signal of a reversal. A breakout higher than 157.80 may be the next best trade, especially if there is a decent amount of momentum behind it.

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