Daily Report: Yen Rises on Risk Aversion, Sterling Hit Hard

Japanese yen surges across the board as the week starts as risk aversion is back to be the theme of the markets. Aussie, Kiwi and Sterling are hardest hit in yen crosses which also dragged them lower against dollar. While Euro also weakens sharply against yen, it remain steady against the green back so far even though EUR/USD looks vulnerable. Nikkei dropped over -1.3% or -135 pts today while European indices are set to open lower. Crude oil dives through 65 level which further confirms the double top reversal pattern.

ECB Trichet said that he's concerned of the lack of coordination of economic policy around the world. Trichet said that "if we return to a picture of internal and external deficits that led to this crisis, we'll have the recipe for a new crisis." He's optimistic on convergence on regulations and elimination of pro-cyclical policies, but he's "skeptical" on coordination.

Technically speaking, as mentioned before, CAD/JPY took the lead and sustained below medium term trend line support. EUR/JPY and AUD/JPY are now trying to get rid of the equivalent trend line to confirm reversal. GBP/JPY is closely following. Against dollar, most significant development so far is GBP/USD's break of 1.6232 support today, which strongly suggest that last week's high of 1.6742 is a medium term top.

On the data front, main focus today will be on US ISM non-manufacturing index. The headline reading is expected to have risen for the third consecutive month to 46 in June as driven by new orders and business activity components. Last week, manufacturing index increased to 44.8 in June from 42.8 in the previous month. We believe similar up trend will be seen in service sectors as recent data have shown improvement. For instance, retail sales stabilized while consumer confidence also improved over the past few months.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.6276; (P) 1.6353; (R1) 1.6404; More

GBP/USD's fall from 1.6742 accelerates today and reaches as low as 1.6140 in early European session. Break of 1.6232 support confirms that the rise to 1.6742 was a terminal impulse following a triangle consolidation. In other words, GBP/USD should have made an important top with bearish divergence conditions in 4 hours MACD and RSI. FUrther decline should now be seen to 1.5810 support next. While some initial support might be seen from medium term rising trend line (now at 1.5660), we'd extend GBP/USD to break through it eventually. On the upside, above 1.6327 minor resistance will turn intraday outlook neutral first. But recovery should be limited well below 1.6742 high and bring fall resumption.

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). Indeed, considering last week's sharp reversal, and with daily MACD breaking its down up trend, such rise might have completed at 1.6742 already. Break of 1.5801 support will now be an important signal that the whole correction has finally completed and will turn focus to next key support of 1.4984 for confirmation. Meanwhile, while another rise cannot be ruled out, focus will remain on reversal signal as we'd expect the whole correction from 1.3503 to conclude inside this 1.6428/7332 area.

Economic Indicators Update

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