New GBP/JPY trade idea

With the UK election less than a month away, the polls are streaming in and pushing implied options volatility higher.

Source: Bloomberg

The prospect for a hung parliament on 7 May is high and both the Labour and the Conservative parties will need to reach out to a number of the minority parties to form a government. This political uncertainty should keep traders from pushing up the pound in any great capacity.

I also view the JPY in a more neutral capacity despite the Japanese central bank expanding its balance sheet by ¥80 trillion a month. Yesterday we saw advisor to Shinzo Abe, Mr Hamada suggesting ¥105 was a more appropriate level for USD/JPY given where purchasing power parity is at present. I would caution from reading too much into this view as many traders would already be cognisant of the fact that at ¥120 the JPY is weak and stretched on this valuation metric.

However, it does show that certain key officials are uncomfortable with both increased stimulus and the impact the weak JPY is having on certain corporates.

Trade idea: Sell a closing break of ¥175.50 on GBP/JPY, for a potential move to ¥170.

Technically, there is huge horizontal support seen between ¥175.37 (the 4 July 2014 high) and ¥175.50 (as highlighted by the blue box). Looking at yesterday’s daily candle we can see indecision in the pair, so I would look for a closing breaking of this support before initiating short positions.

With trend and momentum indicators highlighting a bearish picture, I would look for confirmation in the price action and watch to see that the trend is ready to reassert itself before placing trades. if this develops, I feel we could see ¥170 as a realistic target.

Stops will be updated when the position is active.

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