Daily Report: Dollar Lifted by China Comments, ECB & NFP Awaited

Dollar recovers strongly on supportive comments from China again but after all, financial markets are generally indecisively mixed ahead of key events of ECB rate decision and US Non-Farm Payroll report today. In the currency markets, note that EUR/USD's rebound from 1.3747 is still looking corrective in nature. Meanwhile, yesterday's rebound in GBP/USD and AUD/USD was rather unconvincing and both pairs were held below this week's low. There isn't any follow through selling to send the greenback out of recent range yet but on the other hand, dollar is not decisive enough to have a reversal from recent decline. In other markets, Asian stocks are generally mixed even though DOW did have some nice recovery yesterday. Crude oil continue to hover around 70 level while Gold is also gyrating in range of 920 and 950. All eyes will be on today's key events for inspiration for some sustainable move.

Vice Foreign Minister of China, Yafei, said that "we hope that as the main reserve currency the exchange rate of the U.S. dollar will be stable." China has expressed it's concern that "there’s a need to create an international reserve currency that’s delinked from sovereign nations," to " avoid the inherent deficiencies of using sovereign currencies for reserves." But some economists believe that based on the magnitude of China's dollar holding in the reserve, it will be hard to move out of dollar quickly and smoothly.

ECB is widely expected to leave benchmark interest rates unchanged at 1.00% today. Some signs of near-term stabilization in the economy are seen with recent data, including consumer and business confidence as well as manufacturing and services PMIs. But after all, the recovery is fragile. Underlying deflationary risk remains high with Jun CPI estimate falling for the first time since record by -0.1%. Inflation will likely remain temporarily negative over the coming months. Though, ECB will likely reiterate that the current rates are 'appropriate' and be non-committal to whether 1% is the floor. Markets will await more details regarding the covered bond purchase program.

Economists expect another -375k contraction in the US job markets in Jun while unemployment rate is expected to jump further from 9.4% to 9.6%. Leading indicators for Non-Farm payroll are rather mixed. On the one hand, there was significant improvement in the ISM manufacturing employment component from 34.3 to 40.7. Based on the close correlation of ISM employment and NFP, some further improvement in job market contraction should be seen.

However, the ADP report released yesterday was clearly a disappointment, showing a much worse than expected -473k contraction in Jun comparing to consensus of -374k. While that was significant improvement comparing to May's -532k, the pace of improvements seem to be slowing down. The data also argue that NFP may come in worse than expected to adjust itself closer to ADP in general. Hence, it's quite unclear how today's NFP except that much volatility in the markets is likely after the release.

Data released earlier saw Australia trade deficit came in much wider than expected at -556M. PMI construction and BoE credit conditions survey will be released from UK today. Eurozone unemployment is expected to climb to 9.3% in May while PPI is expected to be flat mom in May. SNB Quarterly bulletin will be released. From US, markets will expect the release of regular initial jobless claims and factory orders in addition to non-farm payrolls.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.6393; (P) 1.6468; (R1) 1.6554; More

GBP/USD's fall from 1.6742 resumes today and at this point, intraday bias remains mildly on the downside and further fall could be seen to 1.6232 support. But after all, as long as this support holds, there is no clear indication of topping in GBP/USD yet. Strong rebound from there, followed by break of 1.6543 minor resistance will flip intraday bias back to the upside for a retest of 1.6742 high first. Break will bring up trend resumption to 61.8% projection of 1.4395 to 1.6661 from 1.5801 at 1.7201. But again, upside momentum is expected to diminish as GBP/USD approaches this level and finally bring reversal. On the downside, break of 1.6232 will in turn be an early signal that GBP/USD has topped out already, with bearish divergence conditions in 4 hours MACD and RSI and will turn focus to 1.5801 support for confirmation.

In the bigger picture, rise from 1.3654 is treated as the third leg of the correction that started at 1.3503, which correct the larger down trend from 2.1161. Such rally from 1.3654 should be in the last stage after meeting target zone of 1.6428/7332 (38.2% and 50% retracement of 2.1161 to 1.3503). Focus will remain on reversal signal as we'd expect the whole correction from 1.3503 to conclude here. On the downside, firm break of 1.6232 support will now be an important signal that the whole correction has finally completed and will turn focus to next key support of 1.5801 for confirmation.

Economic Indicators Update

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