23.08.201915:07 Forex Analysis & Reviews: GBP/JPY: a great opportunity to sell the pound

Dollar pairs froze in anticipation of today's speech by Fed Chairman Jerome Powell, who will take part in the economic symposium in Jackson Hole. In anticipation of this event, the dollar index is actively growing, reflecting the demand for the US currency throughout the market. Despite these trends, it is risky to deal with the dollar now – at the end of the American session, the situation may change dramatically.

If the head of the Federal Reserve focuses on the consequences of the trade war, the inversion of the yield curve and the weak growth of inflation, the probability of a September decline will jump to 100%. Although an alternative option is quite possible – the key macroeconomic indicators of the United States in recent years show growth, so the Fed hypothetically can afford to wait and see. Moreover, some members of the US regulator (in particular, Esther George and Patrick Harker) urged their colleagues to leave the interest rate at the current level. In other words, the intrigue of today's Powell speech remains, and no one knows for sure in which direction the pendulum will swing. In such conditions, it is very dangerous to trade dollar pairs, as the probability of a price reversal at the end of the second day of the economic symposium is quite high.

But the pound/yen cross pair looks attractive at the moment. Yesterday, the British currency rose throughout the market, reacting to the optimistic attitude of Angela Merkel regarding the possible outcome of the negotiation process on Brexit. Let me remind you that the German Chancellor, unexpectedly for the majority of market participants, said that London and Brussels will try to create such a system by October 31, which, firstly, will preserve the terms of the Belfast Agreement, and secondly, will preserve Northern Ireland's access to the EU single market. This is an alternative to the backstop mechanism, which is a key issue in the negotiation of the Brexit deal. Merkel stressed that the parties will try to find a compromise solution in a relatively short time, expressing the hope that politicians "can still resolve the crisis."

Traders did not expect such "peaceful" rhetoric from the head of the German government, so the pound jumped in all pairs, including the yen. But, as often happens, such impulsive price movements, caused only by the emotional reaction of the market, quickly fade. This case was no exception – the pound's revaluation has slowed significantly today, and in some pairs, the British began to actively surrender their positions.

Traders came to the obvious conclusion: the parties have repeatedly made such statements, but in the end, the proposed options were blocked either by the EU leadership, or the British government, or deputies of the House of Commons. For three years, the parties have not been able to go beyond this "Bermuda Triangle", so it is unlikely that they will be able to do it in the remaining weeks. The European Commission spokesman today commented on yesterday's statements by Johnson and Merkel. He reiterated that all EU member states still hold a "common position on Brexit", but are ready to discuss any specific proposals for the deal.

Let me remind you that the draft deal (which was rejected three times by the British Parliament) suggests that the special customs status of Northern Ireland has no time limits, which means it can become permanent. Moreover, according to the provisions of the agreement, London will not be able to abandon this status unilaterally. Brussels insisted that there should not be tight border controls on the island of Ireland, so the parties finally agreed that a special customs status would operate in Northern Ireland – it was the compromise agreed by the Europeans and Theresa May. But deputies of the House of Commons and Boris Johnson, who now heads the government, did not agree. All alternative solutions to this problem did not find support either in the British Parliament, or in Brussels, or in Belfast.

Thus, the problem of the Irish border remains the most complex and controversial issue of Brexit. Many experts doubt that Johnson will offer a "viable" (in the understanding of Europeans) solution to this problem. In turn, Brussels is also in a certain political grip. After all, if the European Union significantly changes the text of the preliminary agreement, it will "open the Pandora's box", thereby leveling the assertion of the inviolability of the agreements reached.

All this suggests that the momentary euphoria of the British currency will soon be replaced by the usual pessimism. After all, Johnson needs to agree on his option to resolve the problem of the Irish border not only with Brussels but also with the Parliament, where he does not have a majority. This task looks, to put it mildly, difficult.

Thus, the temporary growth of the GBP/JPY cross pair can be used to open short positions, with the initial target of 129.35 (the average line of the Bollinger Bands indicator on the daily chart). The next support level is much lower – at 126.50 – this is the bottom line of the Bollinger Bands on the same timeframe, coinciding with the annual minimum.