Daily Report: Markets Stabilized from Risk Rally, Focus Turning to ECB

Dollar and yen stabilized a bit today. Asian equities are sharply higher following the 2.54% rally in DOW but somewhat failed to extend momentum further. The unexpectedly low trade surplus of Australia, at AUD 1.89b in July, which was almost half of expectation, added to signs of slowdown in global recovery. Swissy, on the other hand, is trying to regain strength after stronger than expected GDP report which showed 0.9% qoq, 3.4% yoy growth. After all, markets will likely stay in range ahead of ECB rate decision and press conference today.

At today's meeting, ECB president Trichet is expected to leave the main-refinancing rate unchanged at 1% and reiterate the view that current interest rates are 'appropriate' while 'the risks to the economic outlook are broadly balanced in an environment of uncertainty'. Market's focus will be on the press conference where Trichet will announce the new set of staff macroeconomic projections and extend emergency support for the Eurozone until early 2011. More in ECB To Extend Full Allotment Of Refinancing Operations Towards Year-End.

Other data to be watched include UK PMI construction, Eurozone PPI, Eurozone GDP revision, US non initial jobless claims, pending home sales and factory orders.

As mentioned before, the strong rally in stocks overnight did put some doubt in to our risk bearish view. However, we're still cautiously expect more risk aversion ahead for the moment with key levels in financial markets intact. That includes 10480 resistance in DOW. And 1.2921 resistance in EUR/USD. As long as these resistance levels hold, we'd still favor an eventual resumption in stock selloff and dollar rally.

In dollar index, the key near term level is 81.92. As long as this support holds, we'd still treat price actions from 83.56 as consolidation to rally from 80.08 only. We're still favoring the case that whole fall from 88.70 has finished and a break above 83.56 will bring further rise towards 61.8% retracement at 85.40 at least. However, decisive break of 81.92 will argue that fall from 88.70 is possibly still in progress for at least another test on 80 psychological level.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 129.20; (P) 130.06; (R1) 131.32; More

Touching of 130.61 minor resistance suggests that a temporary low is in place at 128.63 and turns bias neutral for the moment. Some sideway trading might be seen but we'd expect upside to be limited below 133.57 resistance and another fall. Below 128.63 will indicate that whole decline from 137.75 has resumed and should target a test on 126.73 low next. After all, we'd hold on to the bearish view that rebound from 126.73 is finished at 137.75 as long as 133.57 resistance holds.

In the bigger picture, GBP/JPY is still trending well below the medium term falling trend line from 163.05 (now at 137.08) and thus fall from there is still in progress for a test on 118.18 low. Break there will confirm that whole down trend from 2007 high of 251.09 has resumed for 61.8% projection of 215.87 to 118.81 from 163.05 at 103.06 next, which is close to 100 psychological level. However, note that sustained trading above the trend line (now at 137.08) will argue that fall from 163.05 is finished and turn focus to 145.94 for confirmation. Also, this will suggest that such fall is merely the second wave of the whole consolidation pattern from 118.81 and will bring another rise to 163.05 and above before resuming the longer term down trend.

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