It’s NFP week, which means I’m in watch mode to avoid event risk and outsized surprises from not only economic news, but geopolitical situations. For now, I’ve still got my eye on Guppy for a longer-term position.
Even though I did just exit out of a GBP/JPY trade last week, I’m still bullish on the pair because of a few things basic premises:
- Interest rate differential (0.40% in favor of the Pound)
- Potential for monetary policy tightening from the Bank of England as economic data improves
- Relatively weak Japanese economy, which is further behind in its recovery than the U.K.
- Longer-term trend higher (up 5,000 pips since bottoming out around 119.00 in 2012)
Zooming into the four hour chart above, Big Pippin pointed out a symmetrical triangle last week that I’m now closely watching. A break above the lower “highs” connected by the falling trendline and of the major resistance area around 173.00 could draw in more buyers, IF fundamental and sentiment conditions remain the same. And an argument for a move higher (most likely further down the road) would be two things:
- Reduction of quantitative easing by the MPC and/or a rate hike
- Increase of quantitative easing by the BOJ if economic conditions weaken (potentially from the sales tax hike in Japan)
I think the odds of these two things happening are better than average, but it’s gonna be a while, which is why I’m looking at this as a longer-term play.
So, if the market breaks and holds above 173.00, I’ll look to take a small position and target the next potentially major resistance level at 180.00 (a level of strong interest between 2001 – 2003). My invalidation point would be my usual volatility stop of the weekly average true range to give it room to breath.
Now, if the market breaks down to below the rising trendline chart, I’ll have to assess the market drivers before jumping in, but if it is breaking down, it’ll most likely be on broad risk aversion. Lately, the drivers for that behavior have been the Ukraine-Russian tensions and/or weakening economic data from emerging markets, especially China. Both situations aren’t enough for me to get into long-term downside positions, but I’m very open to short-term trades in that direction depending on the data.
Whatever the case may be, I’m in watch mode but ready to jump in. What do you think about my trade ideas? Do you think we’ll see volatility rise? Please share your thoughts in the comment box below!