GBP/JPY Descending Channel Provides Swing Trading Opportunity

The Sterling-Yen pair has carved out an approximate 500-pip descending channel since the beginning of May, when the markets began their volatile swings amid shifts in risk tolerance due to rising concerns on the ability of Greek to remain solvent and whether or not the European Troika would give Greece additional funds, as well as grim economic data that has suggested that global growth remains weak-at-best coupled with rising inflationary pressures in the world’s most developed nations. As such, the GBP/JPY pair, moving on shifts to risk-aversion (GBP/JPY pair weakness) and on inflation expectations (GBP/JPY pair strength), has encompassed investor sentiment for the better part of the past six weeks. Accordingly, with key consumer price index data due out of the United Kingdom on Tuesday, a swing trading opportunity has emerged to catch profits on the upswing or downswing move of the Sterling-Yen pair, predicated on whether or not the inflation data hits or misses its forecast figures.

Levels to Watch:

-Range Top: 134.300 (Range Top)

-Range Bottom: 129.610 (Range Bottom)

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Suggested Strategy – Long: Exceeds CPI Forecast

• Long: Place an entry at 131.703 (10-SMA)
• Stop: Set the stop to 131.140 (56-pip risk, 5-SMA)
• Target: The first target is 132.211 (20-SMA, move up stop to 132.069, 61.8 Fibo), second target is 133.106 (100-SMA)
• Timeframe:2 to 3 days

Suggested Strategy – Short: Disappoints CPI Forecast

• Short: Place an entry at 130.750
• Stop: Set the stop to 131.703 (105-pip risk, 10-SMA)
• Target: The first target is 130.220 (Monday Low, move up stop to 131.140, 5-SMA), second target is 129.610 (Range Bottom)
• Timeframe:3 to 5 days

Trading Tip – The pair is primed to swing wildly in either direction following the consumer price index data, and hence two trades are set up in order to take full advantage of the potential that exists within the GBP/JPY pair descending channel. Accordingly, because the pair has traded further to the downside in recent weeks, I believe there is further potential to the upside on strong CPI data from the United Kingdom. Similarly, today’s gains by the Sterling-Yen pair suggest that the pair is due to correct technically to the upside as well. The daily RSI is rising, at 49 now, and could find support off of the 5-SMA at 131.139 headed into the overnight session ahead of the data release. The MACD Histogram appears to be pivoting as well, with the differential narrowing, and the bearish divergence tailing off; the differential sits at -10, up from -16 on Friday. Finally, our bias towards a stronger move to the upside on stronger-than-expected CPI data is confirmed by the Slow Stochastic oscillator, which has turned today and issued a buy signal, with the %K trending higher than the %D, at 21 and 18, respectively now. However, on weak data, I fully expect the pair to decline as traders will bet on sustained low interest for the coming months until growth picks up, or inflation becomes untamable at the current 0.50 benchmark interest rate.

Event Risk for the United Kingdom and Japan

Both the United Kingdom and Japan have some event risk data on the docket for the next 24-hours, with a rate decision from the Pacific Rim nation representing the most significant piece of data out of the Asian session, and the British inflation data representing the most significant piece of data coming out of the European session directly affecting the GBP/JPY pair.

United Kingdom – While house price data is scheduled to show further deterioration in Britain’s housing market in the early hours of Tuesday’s session in Asia, the key data out of Britain remains their consumer price index for May, which is forecasted to show a 4.5 percent increase in May on a yearly basis. Similarly, core CPI data is expected to show an uptick, although at a 3.5 percent year-over-year rate, down from 3.7 percent in April. Accordingly, if the core data falls short of last month’s reading and accordingly the forecast figure for May, Sterling-based pairs could see weakness across the board.

Japan – While there is a Bank of Japan rate decision on the docket for the Asian session, markets have already priced in the fact that the central bank will leave rates on hold for some time, considering the low rate of inflation, and perhaps more importantly, the necessity to inject liquidity into the country’s capital markets to stoke rebuilding efforts following the natural disasters in March and ensuing nuclear disaster. The rate decision is unlikely to have a major impact on Yen-crosses.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX