Daily Report: Sterling Extends Recent Rally, Dollar and Yen Soft

Sterling continues to ride on last week's post GDP upside surprise rally and extends gain against dollar. While there are doubts on the methodology of the European bank stress test, the pound is also supported by the fact that out of the 7 banks which failed the test, none of them is in UK. Commodity currencies are generally higher on broad based rally in Asian equities. The Japanese yen is soft, but manages to stay in tight range so far. Data front Japan saw merchandise trade surplus widened to JPY 456b in June, lower than expectation. Both exports and imports fell over the month on a value basis. Australian PPI rose much less than expected by 0.3% qoq, 1.0% yoy in Q2. The economic calendar is relatively lightly today and main focus will be on US new home sales, which is expected to climb to 320k annualized rate in June.

The CEBS's stress test result was out last Friday. 7 out of 91 European banks failed the test - failed to exceed the 6% Tier 1 capital ratio under the most severe scenario. These banks are Diada (Spain), Espiga (Spain), Unnim (Spain), Banca Civica (Spain), Cajasur (Spain), ATEBank (Greece) and Hypo Real Estate (Germany). According to the CEBS, the estimated aggregate shortfall is 3.5B euro. In a joint statement, the CEBS, ECB, and European commission said that, 'where the results of the exercise indicate that individual banks require additional capital, these banks should take the necessary steps to reinforce their capital positions through private-sector means and by resorting, if necessary, to facilities set up by Member State governments, in full compliance with EU state-aid rules'. More in Stress Test Result Appeared to be Stronger than Expected. Stringency in Question.

Talking about Sterling's strength since Friday, GBP/CHF also had a sharp rebound. The cross managed to hold above 1.5825 support and recovered strongly, with a small double bottomed pattern. A short term low is in place and we's expect some sideway trading above 1.5825 resistance in near term. Nevertheless, there is no change in the overall bearish view. We'd expect upside to be limited below 1.7073 resistance and finally bring resumption of the fall from 1.8111. Break of 1.5825 will target 2008 low of 1.5111.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.5297; (P) 1.5372; (R1) 1.5495; More.

GBP/USD's rally extends further today and breaches 1.5470 to as high as 1.5499 so far. At this point, intraday bias remains on the upside for 1.5521 resistance. Decisive break there will confirm that whole fall from 1.7043 has completed at 1.4230 already and target 61.8% retracement of 1.7043 to 1.4230 at 1.5968 next. On the downside, below 1.5348 minor support will turn intraday bias neutral first. Also, note that failure at 1.5521, followed by break of 1.5123 support, will revive the case that fall from 1.7043 is still in progress and will flip intraday bias back to the downside for another low below 1.4230.

In the bigger picture, the sustained trading above medium term falling channel argues that whole fall from 1.7043 is finished at 1.4230 already. Break of 1.5521 resistance will confirm this bullish case. Also, this will indicate that rise from 1.4230 is the likely the third leg of the whole consolidation pattern from 2009 low of 1.3503. In such case, stronger rally would be seen to 1.7043 resistance and possibly above before long term down trend resumes. On the downside, failure below 1.5521 resistance and break of 1.4947 support will revive that case that fall from 1.7043 is still in progress for 1.3503 low.

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