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GBP/JPY: Intervention Off the Table (For Now), But Still Room Up to 122.00

Last updated 2/3/2012 1:04 PM EST (GMT -5) 0 Comments - Add your comment

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Matthew Weller

Technical Analyst, GFT

On Wednesday, I outlined a long trade opportunity on the GBP/JPY (see “ GBP/JPY: Safer Speculation on BOJ Intervention” for more). As discussed in the initial article, the trade was primarily based on two medium-term themes: the pervasive strength in the British pound and the potential for intervention into the yen on the part of the BOJ. Unfortunately, developments over the past two days have rendered both theses moot.

First, the widespread strength in the British Pound has petered off in the last few days. Despite a much better-than-expected Service PMI report earlier today, the GBP has been broadly contained, trading in-line with the Euro.

Second, and more disturbing for our open GBP/JPY trade, recent rumblings out of the BOJ and today’s stellar jobs report dramatically reduce the likelihood of intervention in the near future. Yesterday, a BOJ policymaker suggested that there was no need for immediate response to the strength in the yen; these comments stand in stark contrast to previous pre-intervention comments by the BOJ, where policymakers have historically waxed lyrical about “keeping a close eye on adverse exchange rate volatility.” This morning’s unambiguously positive Non-Farm Payrolls report has also led to a rally in the USD/JPY, alleviating some the near-term pressure on the BOJ to intervene.

As a result, the longer-term trade levels are no longer valid, though near-term technical developments still suggest room for a quick rally. With rates breaking strongly above this week’s high and the round 121.00 handle, door is open for a bullish continuation up to previous highs near 122.00.

Specifically, traders could look to lower the profit target to 121.90 (under the previous top) and tighten the stop to 120.17 (below yesterday’s low). With these adjusted parameters, the trade would still offer about a 1:1 risk/reward ratio, but would be more in-line with the near-term bullish technical picture.

Today’s article shows why it’s critical to adjust to changing market conditions; while recent developments have left the initial trade levels invalid, we can still look to take advantage of the near-term bullish technical picture in the GBP/JPY with a shorter-term trade.

Potential Strategy: Lower open GBP/JPY target to 121.90, raise stop to 120.17.

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.

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