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Pound Yen? Or Yen to Pound?
By Mike Conlon | November 18, 2009
The minutes from this month’s Bank of England (BOE) policy meeting have caused the British pound (GBP) to fall this morning, most notably vs. the Euro (EUR) and the Swiss franc (CHF), both around -.8% this morning. The reason for this move was that British policy-makers were split 3 ways in deciding how to extend their quantitative easing program and brought up the possibility of lowering deposit rates on reserves.
As I’ve discussed before, the Brits are by nature a fairly conservative bunch, and markets most definitely don’t like uncertainty. However, by agreeing to expand their debt-purchases, it is pretty clear that the majority are concerned about deflation today, at the risk of incurring inflation down the road.
Nevertheless, while the pound is down today, it is not experiencing what I would call a “major” sell-off. This could be because while the fundamentals are saying the one thing, the technicals could be saying another.
Let’s take a look at a 4 hour chart of GBP/JPY (click chart to enlarge) as this is a popular pair that is traded.
What we are seeing on this chart is what’s known as a “triangle” formation. Based on the direction that the move had occurred, I would call this a bullish pattern. So we are basically looking for a break-out to the upside (outside of the triangle) to occur. However, today’s news has actually caused this pair to break to the downside.
Does this mean that the pattern has failed and to expect this to trade down now? Not necessarily. What sometimes occurs with patterns such as these is that we get “false breakouts” or “head-fakes”. This means that the initial move is opposite what you expect to happen, so you give up on the pattern– before the move you expected takes place.
So does this mean that we are going to see movement to the upside? Again not necessarily. Are you confused yet???
At this point the way to trade a pattern that hasn’t done what you have expected is to wait for confirmation. What this means is that you want to wait for a few more candles to see what happens.
I think of a lot of reasons why GBP can trade higher that JPY despite this most recent news. So I’m going to be keeping an eye on this pair. I’m going to place a buy stop to go long just above the top of the triangle, say at 150.4.
So check back later to see if this gets executed.
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