Talking Points:
-Forex volatility increases on 11 of 12 pairs
-GBPUSD SSI (sentiment) increases to +2.8
-GBPJPY SSI increases to +1.9
GBPUSD Price Channel
Created using FXCM’s Trading Station Desktop
Forex volatility has been kicking up over the past couple of weeks. This was largely shot off by the Chinese currency devaluation and seemed to pick up another round of ammunition with today’s ECB rate announcement and press conference. With growth and inflation readings coming in softer, traders are reading into the possibility of an extended QE program from Euro.
Increased volatility is good for breakout traders as that typically means prices are uncomfortable where they are at and may likely relocate to a new equilibrium. That means levels of support and resistance may break opening up opportunities for breakout traders.
Through the 12 pairs we follow, all but one (EURJPY) showed expanding volatility. Even the EURJPY is showing an increase in activity that if that trend continues, will likely get elevated next week. This means breakout traders may see broad based breakout opportunities.
We are also seeing some growing sentiment readings through FXCM’s retail traders. For example, the GBPUSD is showing 35% more traders who have bought the pair versus one week ago. Additionally, short positions are 7% below levels seen last week. Therefore, the spread between buyers and sellers balloons. Remember, these traders have already bought. Now, they become a future pool of sellers. This growth towards long has built up conditions ripe for a breakout lower and as a result, the pair is listed as a ‘3’ conviction rating.
Additionally, the GBPJPY is showing similar behavior in its sentiment reading. Long positions are 17% above levels seen last week and shorts are 10% below levels seen last week. Therefore, even though the GBPJPY SSI reading is fairly small at +1.85, this figure is growing compared to last week signaling the potential for further losses. If volatility continues to remain elevated, then the GBPJPY may be a good candidate for short positions. As a result, the GBPJPY is listed as a ‘2’ rating.
Below, you will find the conviction chart for the remaining 11 pairs. Anyone can use the conviction ratings to gauge market appetite toward breakouts. To give the ratings more focus, they are viewed through the lense of the DailyFX Plus Breakout2 strategy.
