Lip Service Moves Markets

This past Tuesday, I was listening to a speech from one of the Bank of England’s Deputy Governor’s, Charles Bean.

During his speech, he announced, “asset prices and improved confidence may be signs that the central bank’s bond purchases are working.”

Okay, no biggie there. I expect central bankers to toot their own horn a bit whenever something appears to be working for them.

But then he made a comment that radically moved the British pound. He announced, “It seems that activity here and elsewhere has probably troughed, so some of the worst downside risks look unlikely to crystallize.”

In other words, “quantitative easing should be tapering off soon. Watch for a recovery, because the world is improving.”

Now whether I believe him or not doesn’t really matter. It’s what the market believes that matters. So I watched the charts to see how the market responded to what he said.

After all, how traders perceive what he says is MUCH more important than what he’s actually saying.

This is just one example of how a central banker can move the currency market with their lip service. So if you’re trading a specific currency pair (in this case any pair with the British pound), you always want to be mindful of major central bank speeches or other news that could move and shift your currency pair.

To illustrate this idea, let’s take a look at how this one speech affected the British pound earlier this week…

How Bean Just Moved the Pound

Here’s what happened…

The GBP/JPY pair started moving up as he was speaking. (This means the British pound rose in value versus the Japanese yen.) I kept glancing back at the charts here and there, while I continued listening to the speech.

He went on, “At some stage, as the recovery proceeds, the Monetary Policy Committee will need to gradually remove the large monetary stimulus that we have imparted into the economy, otherwise we will be in danger of overshooting our 2% inflation target.”

(Note: inflation as noted by year-over-year CPI stands at 1.1% right now).

Oh the market really loved that statement. It bid up the GBP/JPY pair even higher!

The U.K. is One of Three Nations that
Has to Watch Inflation Right Now!

Keep in mind that the U.K. is one of three nations that even has inflation out of the G-8 major countries. All others are still in a period of deflation. So this is something they seriously have to monitor.

So as I was watching this speech unfold, I was also watching the hourly chart of GBP/JPY at the same time.

As the speech came to a close, I couldn’t help but notice it appeared that GBP/JPY was forming a bullish pattern called an “inverse head and shoulders pattern.” The “head and shoulders pattern” got its name because the trend line actually rises and fall three times, and therefore looks like a human head and two shoulders.

In this case, we’re looking at an “inverse” head and shoulders pattern, so the head and shoulders appear upside down on the chart.

The speech gave this currency pair the momentum to run up to a critical point in the pattern that validates the pattern, called it’s “neck line.” (Again, think a head and two shoulders and you’ll understand what a “neck line” refers to.)

Check it out on the chart below.

BOE’s Bean Carves Out a Bullish Pattern on the Charts!

As I left work that day, I noticed this pair closed a candle over the neck line. Then several candles held above this black neck line.

Now, if the pullbacks still hold above the neck line, this technical chart pattern projected a minimum price target of 146.00 for the currency pair.

Note: You can make price projections on this pattern by drawing a vertical line from the bottom of the head straight up to the neck line. Then take that same measurement and project it out from where it breaks above the neck line. That will give you a MINIMUM price target. It can do more but rarely does less than the target.

It doesn’t usually go straight up and hit the target. This can take days or even a week or so to happen but the point is that it gives you the confidence to hold the trade until the target is met.

Now, in this case, the price target also happens to coincide with a major downtrend line as well. So, in this case it may very well be the ultimate target should the main downtrend resume afterwards.

The great thing about a head and shoulders pattern is that if for any reason the neck line doesn’t hold and the pair drops back well below it, then you have another prime shorting opportunity too.

So either way, with this pattern, you have a “line in the sand” to help you in your trading and to give you a bullish or bearish bias just by the how the pair deals with the neck line on the chart.

Why It’s Good to Know BOTH Fundamentals & Technicals!

Here’s what I find amazing. Central bank speeches and fundamental data releases seem to coincide with chart patterns and stimulate their completions.

This is why I say that fundamentals and technicals are not opposed to each other. They actually compliment each other. It’s actually the fundamental forces that form the trends on the charts. In other words, it’s the “real” reasons why the trends form.

However, the recognition of chart patterns can prepare you for these trade set ups AHEAD OF TIME, which is key in trading. Then technicals can give you points on the chart at which you’d want to enter.

Fundamentals have a hard time doing that part.

Indeed you don’t have to choose to be JUST a fundamental trader or JUST a technical trader. You can actually be BOTH and it really pays to know something about both.

Have a nice weekend!
Sean Hyman, Professor FX

EDITOR’S NOTE: If you’re one of our Chart of the Day subscribers, then you already know about this technical set-up for the British pound. Sean released this story to Chart of the Day followers this past Wednesday. He introduces all traders to key technical charting set-ups like this five days a week. Now, you can follow some of his best moves absolutely FREE. Click here for details.

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