Consolidation Break Coming to GBP/JPY?

Forex Trade Idea: 2014-09-30

With volatility picking up all over the markets, it’s an unusual sight to see price action in GBP/JPY contracting over the past week. Is this a consolidation-breakout play setting up?

GBP/JPY 1 Hour Forex Chart

GBP/JPY 1 Hour Forex Chart

Actually, when I look at the fundamental drivers for both Sterling and the yen, it’s easy to see why forex traders can’t push the market one way or another. In the U.K., we’ve seen weaker-than-expected economic data this week, including today’s disappointing current account number that shows more capital and goods flowing out of the country. On the other side of the pair, the Japanese yen continues to be beaten down on sentiment that the Bank of Japan will continue its easy money policies to battle weak economic conditions and deflation.  This has all lead to a tight trading range for guppy, but where is it going next?

Of course, no one knows for sure, but there is potential for the market to move this week with top tier economic data coming from the U.K. this week in the various forms of PMI data. They’ve been known to be short-term market movers in the past, so these data points could be the driver for a breakout move in either direction.

I am more biased towards playing a long position higher because of the longer-term uptrend and outlook of Japan’s monetary policy, which is why I placed orders above the top of the range for now.  My maximum stop will be near the bottom of the range, but I won’t hesitate to close quickly if the market can’t sustain a position above the break; if that’s the case, my loss will be very limited.  My initial target will be the previous swing high, at which time I’ll decide to cut out or hold on depending on the market environment.  Here’s what I am doing:

Long full position GBP/JPY at 178.60, stop at 177.00, profit target at 180.50

Remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t follow what I do. Risk Disclosure.

I’m only risking 1.00% of my account on this one, and with this trade structure, I have a potential reward-to-risk ratio of about 1.18:1. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. And if the data, geopolitics or risk sentiment turns bad for whatever reason, I’ll consider reversing my trade on a breakdown move lower.  Stay tuned!