In this week’s Weekly Watch, I mentioned that GBP/JPY is retesting a potentially strong inflection point around 170.00. Will it hold or fold?
On the daily chart above, we can see the pair testing a potentially strong support area that consists of an area of previous influence (168.00 – 170.00), a major psychological level (170.00), and a rising trendline. I’m sure this is attracting a lot of eyeballs, and therefore a lot of potential buy and sell orders at the moment.
Fundamentally, I’m bullish on sterling relative to the Japanese yen, but with the BOJ refraining from new stimulus and the BOE refraining from reducing easy money policies at the moment, I think it’ll be a grind if support holds and the pair does move higher. Without a major catalyst currently on the horizon, this is a trade that I look to hold onto for a while.
So, I’m looking to enter long on this pair but on another retest of 170.00–most likely sparked by today’s upcoming U.K. CPI number. This number has been steadily moving lower, and if we see another tick lower, there’s a good probability that sterling will take a hit as declining consumer prices is supportive of the BOE’s decision to cut stimulus measures.
My position will be very small to start with and my stop will be wide, below the previous lows we saw mid-March around 168.00. Here’s what I am dong:
Long quarter position at 170.00, stop at 167.50, first target at 173.00
I look to also add another quarter position around 168.00, but only after seeing what’s moving the markets at that point and doing a reassessment. If both positions are triggered, I’ll have an average price of 169.00, which means I’m only risking 0.50% of my account on this one. And with this trade structure, I have a potential reward-to-risk ratio of about 2.66:1.
If I’m in the trade at it does reach my first target, I’ll reassess and determine my next step then. Ultimately, I’d like to shoot for 180.00, but of course, it’s the forex markets and you never know what will happen. Geopolitical risk, pockets of global economic weakness, and the Fed’s reduction of QE looks like it’s having a big impact on broad risk aversion (Yen positive). For now, I’ll just have to sit back and see how it all plays out.