GBP/JPY Channel Offers Set-up with Profit Potential

Trading Tip – A looming BoE rate decision will most likely lead to quiet price action before the determination of future monetary policy. A degree of volatility should be expected following the decision, as it appears that markets have priced in the potential for the central bank to add to their quantitative easing. We have set our entry point to absorb any noise that may occur following the release as a new trend may not take hold until after the post release volatility. Another pause from the central bank could be the catalyst to spark the necessary reversal to make our strategy pay off, but isn’t required. A signal that any new measures are the last attempt by policy makers to boost liquidity could also generate the desired reaction. Meanwhile, bullish yen sentiment has begun to fade as stocks and commodities have found support on the back of stronger than expected growth figures from several developed economies including the U.S. Risk appetite has been limited with concerns that weak labor markets will continue to weigh on domestic growth and threaten the recovery. Markets will focus on Friday’s US NFP release which could alter risk trends and impact yen crosses. It may be prudent to wait for the event risk to pass before entering any significant positions. A resumption of the bearish trend would negate our set-up but not the potential for a reversal, as a failed test of support at 131.49-3/12 low could also trigger a new bullish trend.

Event Risk for U.K. and Japan

U.K. – The BoE rate decision may end up being the biggest event risk on the week as the central bank could potentially add to their asset purchase program. Strong consumer confidence and service sector reading has brought into question the need for more stimuli. The visible trade balance kicks off next week’s calendar which may have little impact on price action following this week’s event risk. Traders should look for evidence that export demand is sustaining as domestic growth isn’t ready to take the wheel and steer the economy.

Japan – The Japanese fundamental calendar is filled with significant release but none may have any significant impact on price action for the pair, as they will have little influence on broader risk trends. The 4Q GDP has the most market moving potential as negative growth could bring into question the yen status as a funding currency. Yet, we would probably need to see a major contraction to evoke concerns over the world’s second largest economy. Domestic CGPI will provide insight to the length of the current deflationary period. Consumer price have already started to trend higher and if we see input cost start to raise then upward pressure on inflation may continue.