BOE Stays the Course!

British policy makers voted unanimously to keep their quantitative easing plans in place, signaling that the UK economy may not be rebounding as fast as they would like. This could lead to a longer period of low interest rates as the UK attempts to fight off deflation. As a result, the British pound (GBP) is near a two-month low against the US dollar (USD), trading just under 1.60 at 1.594.

In the meantime, it appears as though traders may have left early for the holidays as volume seems light. The US dollar is taking a brief pause today, down against every currency but GBP. This comes on the heels of the 5.1% rally the dollar has been on since year end. So this is a welcome pause.

Also, the US dollar has been on a tear against the Japanese yen (JPY) as the rising yields in the US are discouraging US dollar carry trades in favor of yen carries.

Let’s take a look at the daily chart of (USD/JPY): (click chart to enlarge)

As you can see, this pair has bounced off its low near 85 and has been on a steady climb higher. I identified this move at the beginning of the month in this article from Dec. 2nd. What I wanted to show in today’s chart was how you can use Fibonacci retracement levels to see where to get in and out of trades.

Today’s pause occurs right at the 38.2% retracement level. If you were looking to scale out of the position or sell some this could be a good place to do so. At these levels there will typically be pockets of resistance. If the trend continues higher, then we expect to reach the next level at 50% at a price of 93.68. Should the pair pull back, then we would expect to see some support at 89.8, the 23.6% level.

So as you can see, knowing where these Fib levels are can really impact your trading, helping to show you where “hidden” support and resistance may be. This is important because it can help you know where to place your stop and limit orders which will help you manage your trades.

I expect that we’ll see continued dollar strength through year-end and into the new year, so I’m going to be buying on pull backs of this pair.

To learn more about how Fibonacci levels and other tools of technical analysis can help your trading, be sure to check out our currency trading courses!