|
|
How stable is the GBP/JPY Range? • Levels to Watch: -Range Top: 150.80 (Range, Pivot) -Range Bottom: 140.00 (Fib, Range, Pivot) • Surging risk aversion has fueled yen support and sent the GBP/JPY lower to test the lower bound of a broader range. The catalyst for price action has little to do with the British or Japanese economy. Concerns over European sovereign debt issues and U.S. unemployment have sent flows away from risk assets leading to Yen support as the carry trade unwinds. The move could be overdone and a strong labor report tomorrow could lead to a reversal. • The 140 price level has held as solid support with the pair immediately retracing any test of the level since breaking above it in early March, 2009. The 50.0% Fibo of 118.84-163.14 at 141.00 has also proved formidable adding significance to the current range. Suggested Strategy • Long: Considering the broader risk trend, we will place an entry at 142.40, the 38.2% Fibo of 147.25-139.36 to ensure a retrace. • Stop: Set the stop to 1.4100 broader Fibo Support. To secure profit, move the stop on the second lot to breakeven when the first target hits. • Target: The first target is 1.4500 trend line resistance and a complete retracement of today’s move. |
Trading Tip – The level of concern over the sovereign debt issues in Europe could continue to lend Yen support. Contrary to the height of the credit crisis there are a number of positive fundamentals for bulls to hang their hat on which should limit the potential of the one way price action. The sharp move lower presents a buying opportunity for those with a rosier outlook. Considering the BoE “paused” their asset purchase program, sterling support was a reasonable expectation absent the broader risk trend. Therefore, we could see a delayed bullish reaction once fears subside which could be triggered by a strong U.S. labor report. The expected job growth in the world’s largest economy could turn the tide back in the favor of optimism which was the prevailing theme to start the week when global output showed signs of continued strength. We will be looking for more than a brief reaction which is why we set our entry at a significant retracement level to ensure that there is sufficient support to generate the desired gains.
Event Risk for the UK and US
U.K. – U.K. factory gate prices are forecasted to rise to 3.7% from 3.5%. An improving economy may allow retailers to pass through costs to consumer putting additional pressure on inflation which is already well above the BoE’s 2.0% target at 2.9%. A move beyond the threshold would require Governor King to write a letter to the government explaining the breach and a plan of action to counter rising prices. Next week’s quarterly inflation report will take on additional importance due to the increasing price pressures making it the most significant event risk over the next week.
Japan. – Japanese fundamental data typically has very little impact on the domestic currency’s price action which shouldn’t change this week. It is clear that the yen has wrestled the title of top funding currency (and safe haven) from the dollar based on today’s price action. Unless, the prevailing sovereign debt issues raise “end of the world” concerns again, expect the current risk relation to hold going forward. The trade balance, machine orders and the Eco Watchers survey are significant measures of the Japanese economy and could point toward improving growth. However, with the BoJ forecasting deflation to rein over the next two to three years they will have little impact on interest rate expectations.
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
Learn forex trading with a free practice account and trading charts from FXCM.
