It would take an extraordinary round of event risk to drive GBPJPY to break from its well-developed range; but this is exactly what we may see come tomorrow. While there is a very small yield differential behind this pair, risk appetite nonetheless has a profound influence on its direction and volatility.
Why Would GBPJPY Hold a Range?
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 150.00 (Fib, Triple Top)[/B]
[B]-Range Bottom: 139.00 (Trend, Fib, SMA)[/B]
· Event risk is a threat for the entire currency market - and GBPJPY certainly does not escape its long reach. Over the next 24 hours, there will be two specific events that could produce the kind of volatility that catalyzes a breakout. In the early London session, the Bank of England rate decision is already being written off. However, changes to debt purchases can lead to surprise. The Fed Stress Test is perhaps even more difficult to benchmark.
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· Like so many other ranges developing in the currency market now; GBPJPY congestion does so against the current of a significant trend. Resistance is built around a long-term 38.2% Fib retracement that has found recent confirmation through a triple top going back to early April. However, the rising trend from the January reversal requires resolution.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Short[/U][/B][B]: Half sized (or smaller) entry orders will be placed at 148.85 which isn’t really aggressive.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 150.25 is conservative given this pair’s normal level of volatility. 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 (140) at 147.45 and the second[/B][B] target will be 143.45. [/B]
[B]Trading Tip[/B] – It would take an extraordinary round of event risk to drive GBPJPY to break from its well-developed range; but this is exactly what we may see come tomorrow. While there is a very small yield differential behind this pair, risk appetite nonetheless has a profound influence on its direction and volatility. This is the dominate concern over the next 24 hours with the Federal Reserve expected to release the [results of its Stress Test](http://www.dailyfx.com/story/topheadline/Bank_Stress_Test_Could_Sink_1241624854393.html) of the United States 19 largest financial firms. Policy officials have done what they could to reduce the potential for surprise – and therefore an adverse market reaction – but the impact on forecasts is too significant to be fully discounted. The other threatening piece of event risk on deck is the Bank of England’s rate decision. Though the MPC can’t cut rates much further, they can lower their forecasts and up their intervention. This is event risk, we can’t reasonable avoid. Therefore, we will look to cut our notional exposure to this wave of data by cutting our position size by at least half (though a third or quarter of a normal position is more suited to this setup). We will remove any lingering orders by the afternoon, US session to avoid the worst of the Stress Test volatility. Furthermore, if spot hits 147.50 or 150.50 before we are entered, all open orders will be canceled. Monitoring price action around tomorrow’s event risk is an absolute necessity.
Event Risk for UK and Japan
UK – The British pound will be dealt a hearty round of event risk over the coming week. Whether this data can translate into actual price action though is questionable. An immediate threat to the sterling is Thursday’s Bank of England rate decision. Already at 0.25 percent, the policy authority doesn’t have room to cut much further; and even if they did, it would neither help accelerate an economic recovery nor surprise an already pessimistic crowd. However, there is the potential for surprise through policy forecasts that could accompany the alterations to policy. What’s more, notable changes to the unorthodox steps the MPC has adopted as the recession deepens (private debt purchases, quantitative easing) may translate into desperation for market participants. Beyond this prominent incident, there is a round of notable but standard routine event risk scheduled after the weekend. RICS Housing Prices, the BCR Retail Monitor, industrial production and employment activity are all numbers that will play into the general forecast for economic health.
Japan – Scheduled economic indicators are as threatening for the Japanese yen as they usually are - that is to say ‘not very.’ However, we could see a dramatic change in course and activity level of the yen crosses over the next 24 hours due to the Federal Reserve’s stress test. This report is expected to deliver a failing grade to 10 of the United States’ 19 largest banks under the conditions of being able to survive an extended recession. There has been an improvement in forecasts for activity; and the government has made an obvious effort to leak the results ahead of time. However, an assessment of just how bad the situation is (not just with the bank’s health but the scenarios for growth) could deliver the market a shock.
[B]Data for May 7 – May 14[/B]
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[B]Data for May 7 – May 14[/B]
[B]Date (GMT)[/B]
[B]UK Economic Data[/B]
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[B]Date (GMT)[/B]
[B]Japanese Economic Data[/B]
May 7
Bank of England Rate Decision
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May 7
BoJ Meeting Minutes
May 11
BRC Retail Sales Monitor (APR)
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May 12
Leading Index (MAR P)
May 12
Industrial Production (MAR)
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May 12
Trade Balance (MAR)
May 13
Jobless Claims Change (APR)
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May 14-19
Cabinet Office Monthly Economic Report
Written by: John Kicklighter, Currency Strategist for DailyFX.com.
Questions? Comments? You can send them to John at <[email protected]>.