We’re finally seeing another pullback in GBP/JPY, a rare occasion since bottoming out in April and rallying ever since. Is this a new opportunity to jump in the uptrend?
After finding really strong support at 175.00 in April, we can see on the four hour forex chart above that Guppy has been on a strong rally higher. And it’s only had one pullback since then up until today’s dip thanks to another dip in U.K. CPI data, this time into negative territory. Bank of England Governor Mark Carney actually warned that inflation will likely remain low, and since he hit that nail right on the head, it wouldn’t be out of the question to go along with his outlook that inflation will pick back up towards the end of the year. So, for Sterling, this dip may continue further but it may not last for too long.
And with the Bank of Japan likely to keep easy money going after pushing back the timing of when they would hit their inflation goals , the Japanese yen is likely to remain under pressure as long as we don’t run into a catalyst that would bring about risk-off flows.
So with this pullback, if it does reach the area where we see broken major resistance and a rising trendline intersecting (and at a major psychological level), then I’ll look to go long with a very small position and wide stop given the strength of the recent move lower. Plus we’re set to get a string of major economic events coming up from both the U.K. and Japan this week. Here’s what I’m doing:
Long half position GBP/JPY at 185.00, stop at 182.50, initial target at 190.00
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 1.42:1 at my initial target. But I do look to maximize my gains given the right stories from both the U.K. and Japan this week (i.e., scaling in if the trade does go my way).
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. Stay tuned!