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GBP/JPY: Safer Speculation on BOJ Intervention

Last updated 2/1/2012 1:10 PM EST (GMT -5) 0 Comments - Add your comment

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Matthew Weller

Technical Analyst, GFT

With the USD/JPY currently trading at 3-month lows, and within 70 pips of the all-time low, the market is on edge waiting for potential intervention from the Bank of Japan. Rates are already within the Intervention “Red Zone” mentioned in my daily Live Market Analysis webinars, and with every tick lower, the risk of intervention rises. However, the recent weakness in the U.S. Dollar indicates that there may be a more favorable pair to trade in anticipation of BOJ intervention.

Enter the GBP/JPY. The British Pound Sterling has been extremely strong lately against a number of major currencies and has closed higher against the USD 12 of the last 13 days. Meanwhile, the GBP/JPY daily chart shows that the pair has found a floor at the 50% retracement of the mid-January rally and may be ready to start trading higher. Further bolstering the bullish picture on the daily chart, today’s price action has formed a Bullish Engulfing Candle*, showing that buyers have gained the upper hand and further rallies are likely.

Zooming in to the 4hr chart, a clear support area becomes evident. On two occasions so far this week, prices have found a floor near 119.60 before bouncing. As of writing, the pair is approaching anticipated resistance at the round 121.00 handle, though if rates can break above this level, a further continuation up to previous resistance near 1.2200 or 1.2250 will be favored.

To take advantage of continued strength in the GBP/JPY, traders could set a stop buy order at 121.05 (above the round 121.00 handle) with a stop at 119.54 (under the floor outlined above) with a target at 1.2250 (just below resistance from December 2011). This trade would be invalidated by a drop below 119.54 prior to entry or if not triggered by the end of the week.

When trading forex, many traders prefer to match strength against weakness. By pairing a currency that has been showing relative strength against many others (the GBP) against a currency that may drop sharply in the near future (the JPY), there are two ways that this trade can win.

Potential Strategy: Buy if GBP/JPY breaks above 121.05, stop at 119.54, target at 122.50

For more intraday analysis and trade ideas, follow me on twitter ( @MWellerFX ) and attend our daily Live Market Analysis webinars. Visit your local GFT website under “Seminars and Webinars” to sign up.

  *A Bullish Engulfing candle is formed when the candle breaks below the low of the previous time period before buyers step in and push rates up to close above the high of the previous time period. It indicates that the buyers have wrested control of the market from the seller.

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