There is a lot of danger in identifying ranges that have ties to risk appetite; but there are a few pairs that are even more hazardous to cautious traders due to unique event risk. GBPJPY happens to be one of those pairs.
Why Would GBPJPY Hold a Range?
[B][/B]
· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 162.50 (Double Top, Fib)[/B]
[B]-Range Bottom: 152.85 (Fibs, Pivot, SMA)[/B]
· There are two prominent risks to GBPJPY going forward; and one is temporary while the other will be lasting. The short-term threat comes in the form of [Thursday’s BoE rate decision](http://forexforums.dailyfx.com/trading-news-live-coverage-dailyfx-analysts/92553-trade-news-live-bank-england-boe-rate-decision-august-6th-2009-06-45-est.html). This event will produce more volatility than direction as the MPC is seen as being generally dovish – now they are just debating over the specifics of the bond purchasing program. More lasting is unpredictable risk appetite which sees few certain drivers (perhaps the NFPs).
[B][/B]
· When examining the technical perspective of this pair, we should taken into account all risk appetite. The dollar-based majors have largely forced their break; but the yen crosses are stations below resistance. One side will have to give. GBPJPY has a major double top at 162.50; and the bullish bias will be defined by short-term support near 160.
[B][I]Suggested Strategy[/I][/B]
[B][/B]
· [B][U]Short[/U][/B][B]: Half-size entry orders will be placed at 162.00 which is well within this week’s range.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 163.50 covers a potential double top but doesn’t allow for a large tail. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]
· [B][U]Target[/U][/B][B]: The first objective equals risk (150) at 160.50 and the second[/B][B] target is set to 156.50. [/B]
[B]Trading Tip [/B]– There is a lot of danger in identifying ranges that have ties to risk appetite; but there are a few pairs that are even more hazardous to cautious traders due to unique event risk. GBPJPY happens to be one of those pairs. Like most of the other yen crosses, this specific pair has pushed up to significant resistance and has fallen on congestion just before driving to the next phase of the rally in sentiment (this notably contrasts the dollar-based majors which have stalled just after their break). This in itself puts significant speculative pressure on choosing a direction that the broader market will have to define. However, more unique to this pair is the threat to short-term volatility in the Bank of England’s rate decision due in Thursday’s London session. While this policy announcement is unlikely to develop a new trend on its own, it can very well produce an unfavorable false break that runs our stop. All of this needs to be taking into account when evaluating the potential double top for this pair. Clearly, this is setup that is reasonable only for those with a high toleration for risk. Beyond this qualification though, we seek to reduce risk by cutting position size, widening the stop and setting a first target that can be reached without a definitive breakout. We will hold this position through the BoE rate decision, but we will need to watch price action closely and be ready to remove the order should it be necessary. Alternatively, we will cut all open orders before Friday’s NFPs. For those looking for a more stability for a range setup; a break below 160 would be a good sign.
Event Risk for UK and Japan
UK – The British pound has surged higher against its relatively lower-risk counterparts at the start of this week. Clearly, this currency is finding market sentiment its primary fundamental driver. However, the fundamentals behind this move are left wanting. Forecasts for a tentative return of positive growth lack confirmation; and even when the technical recovery is in place, expansion will likely be absent until employment and consumer spending return globally. In the meantime, speculation will define price action with few cues as to when a dramatic shift is coming. The only thing pound traders can do is take note of the meaningful economic indicators on the docket and monitor their short-term impact on volatility and lasting ability to guide the currency’s trend (a sign itself that the risk factor could be giving way to more tangible influences). Without doubt, the top piece of event risk over the coming week is the BoE rate decision. There is little probability of a rate change, but growth forecasts and quantitative easing are free rein. Meanwhile, a line of top releases (consumer confidence, services, factory activity) will try to shake the pound’s correlation to risk.
Japan – In comparison to previous weeks, the Japanese economic calendar through next Wednesday raises moderate concern for event-driven price action. However, there are a few particular general considerations to keep in mind. The Leading Index, consumer confidence and Eco Watchers survey will help guide growth forecasts; and the BoJ monthly report will give officials’ view. The real risk for this currency though is in general risk appetite trends. Notoriously hard to predict, we have to just monitor major economic releases.
[B]Data for August 6 – August 13[/B]
[B][/B]
[B]Data for August 6 – August 13[/B]
[B]Date (GMT)[/B]
[B]UK Economic Data[/B]
[B][/B]
[B]Date (GMT)[/B]
[B]Japanese Economic Data[/B]
Aug 6
BoE Rate Decision
[B][/B]
Aug 6
Leading Index (JUN P)
Aug 10
BRC Retail Sales Monitor (JUL)
[B][/B]
Aug 10
Eco Watchers Survey (JUL)
Aug 12
Jobless Claims Change (JUL)
[B][/B]
Aug 11
Consumer Confidence (JUL)
Aug 12
BoE Quarterly Inflation Report
[B][/B]
Aug 12
BoJ Monthly Report
Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? You can send them to John at <[email protected]>