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GBP/JPY Resurgence Helped By Hawkish Comments From Fed's Bernanke

It’s a new week in the trading contest and we’ve subsequently seen the top 3 from last Thursday and Friday knocked out. Indeed, it appears that a single trader is occupying the front end of the leaderboard, and his most profitable positions have been (unsurprisingly) in GBP/JPY. This has, by and large, been the most frequently traded pair amongst the leaders in the currency trading portion of the contest. However, because of its tendency to be extremely volatile, there is a significant amount of risk that comes along with buying or selling the pair.

Since we believe the same person is holding multiple leading portfolios, and they essentially are trading the same positions, we’ll just take a look at the portfolio with the largest balance. The number 1 currency trading portfolio is nothing to scoff at, as it amounts to $181,565.46, and like many of the traders that have taken the number 1 spot since the start of the contest, this one accumulated the majority of his profits by buying GBP/JPY on May 23 near 204.50 and selling near the May 29 highs. Indeed, this move netted him over $35,000. However, this contestant has started to take on shorter-term positions which have proven to be similarly profitable. In fact, he immediately flipped his GBP/JPY position on May 29 by selling the pair at 208.61, and closed the short position yesterday near 205 for a profit of almost $34,000. That wasn’t all for our daredevil trader though, as he flipped the pair yet again and bought GBP/JPY near 205. As of Monday’s close, his long GBP/JPY position was still open, and thus far, it has moved very much in his direction.

Indeed, forex carry trades and US stock markets started this morning on a strong note following hawkish commentary from Federal Reserve Chairman Ben Bernanke. The comments came from a scheduled speech at the International Monetary Conference in Barcelona, during which Bernanke suggested that additional rate cuts are off the table for now, as “policy seems well positioned to promote moderate growth and price stability over time.” However, Bernanke’s pronounced focus on upside inflation risks from continued gains in commodity prices were the most hawkish comments at all. There now appears to be a fear within the Federal Reserve that the public’s long-term inflation expectations will rise, and “could ultimately become self-confirming.” Just last week, Fed Vice Chairman Donald Kohn expressed similar concerns, and it is becoming clear that the central bank is having difficulty managing these inflation expectations, as record high oil prices prove to be a bit more convincing.

Bernanke also noted that the Federal Reserve is aware of the negative implications of a weak dollar on inflation and inflation expectations, which was somewhat unusual as he has said little regarding the currency even as it hit record lows just over a month ago. However, he expressed confidence that the Federal Reserve’s dual mandate to foster maximum sustainable employment and price stability would be a key factor to ensure “that the dollar remains a strong and stable currency.”

The price action we’ve seen this morning highlights how market-moving Federal Reserve-related news can be, whether it be a rate cut or simple commentary from Chairman Bernanke. It is very important to keep tabs on event risk in the forex markets, as unexpected news can easily shake traders out of their positions, or make them even more profitable.

Congratulations to our top three traders and good luck!

Terri Belkas, Currency Analyst for DailyFX.com

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