GBPJPY Offers a Risky but Otherwise Risk-Stable Range

How stable is the GBPJPY Range? •    Levels to Watch: -Range Top:       151.50 (Fib, SMA, Pivot) -Range Bottom: 140.00 (Fib, Double Bottom) •    Volatility for any yen cross is the responsibility of underlying risk appetite under most circumstances. GBPJPY is no exception; but in recent months, we have seen the correlation between the normally responsive yen crosses break away from risk appetite. However, when it comes to volatile shifts in underlying sentiment; these pairs react immediately and as expected. Through the near-term, the economic calendar will also raise the threat level. •    GBPJPY’s technical landscape is much different than that of its yen-based counterparts. Where the other pairs look more like EURJPY with its rising wedge formation; the sterling cross does not have the same dominant formation to work with. What has worked well to define price action though is the 100-day SMA and relative pivot levels. Suggested Strategy •    Short: A reduced size short entry order be set well within our range high at 151.15. •    Stop: Placing a stop at 152.25 covers our range of highs; but a false break can clear that level. To secure profit, move the stop on the second lot to breakeven when the first target hits. •    Target: The first objective is one and a half times risk (165) at 149.50. The second is 147.85.

Trading Tip – Considering the activity in sentiment trends and those pairs that are tuned in to that market frequency over the past 24 hours; there is considerable danger in positioning for a range setup in a yen cross. However, a comparison between those markets usually considered a barometer for investor sentiment and a pair backed by the Japanese yen shows two very unique patterns. This is a good sign for range traders as one of the dominant forces for the broader markets has a limited influence on this currency’s price action. Nonetheless, there is still considerable risk. While the larger trends for the yen crosses don’t carve out the same path as say equities; the currencies are very sensitive and responsive to volatility. This requires a strategy that limits risk and plays at the base currency’s strengths. For our GBPJPY setup, we immediately look to reduce position size. We have also placed our levels to take advantage of the technical backdrop while still limited risk. Our entry is set at a comfortable buffer below our range of support. The stop is the most important component of the trade as it should cover most wild reversals as long as the surge in volatility doesn’t occur near our highs. At he same time, while it does cover the 100-day SMA (a very good sign of direction for this pair); it is not much high above the moving ceiling and certainly doesn’t cover the October 23rd swing high. There is a lot of near-term event risk to watch out for when trading this pair. For is not a setup for the cautious crowd. We will cancel any open orders by Wednesday.

Event Risk for the UK and Japan

UK – Event risk is heavily front-loaded for the British pound. Coming out very shortly, the BRC Retail Sales Monitor and RICS House Price Balance for October are leading and key readings for the economy; but as proprietary releases; they do not have the clout of a government release. The impact these two indicators ultimately have will depend on their surprise quotient. Should there be a dramatic change in the outlook for home sales or consumer spending due to these particular indicators; the pound could easily absorb an inordinate amount of volatility. The real trend-defining event risk is due the following day. The BoE Quarterly Inflation Report will be particularly interesting to fundamental traders as they try to interpret the central bank’s logic for increasing the bond purchasing program by 25 billion pounds at their last rate decision. It could easily alter rate speculation for the months ahead. Another proven market mover is the jobless claims change. This indicator is as much an economic barometer as any in the UK’s arsenal.

Japan – Though there is debate over whether the Japanese yen or US dollar make for the better funding currency; there is little doubt that the former currency has a clear connection to market sentiment. Risk appetite is still bullish; but the drive to new heights of optimism has been curbed some time ago. Investors are waiting for the next wave of capital to further the drive or the death knell in an aggressive bout of profit taking. As for the economic calendar, there are top tier releases; but the Japanese docket has long lost its influence over price action. The exception may be the 3Q GDP numbers. This is the one area where Japanese data can really weigh in.

Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at jkicklighter@dailyfx.com