Mid-Day Report: Dollar Firm after Mixed Data

Dollar remains generally firm in early US session after a mixed bag of economic data. Though again, the strength is mainly seen against Euro and Yen. ISM non-manufacturing index unexpectedly improved to 40.6 in Dec but is still deep in contraction region below 50. Employment component also improved slightly from 31.3 to 34.7 while price paid dropped slightly from 36.6 to 36.0 only. However, factory orders dropped much more than expected by -4.6% in Nov while pending home sales also dropped much more than expected by -4.0% in Nov. Dollar index reaches as high as 84.01 and is still firm for further rally to retest 88.46 high. Focus now turns to FOMC minutes of the Dec 15-16 meeting which should reveal more information on Fed's quantitative easing campaign.

Canadian dollar is lifted mildly by rebound in crude oil prices which breaches $50 level earlier today. Though momentum in the Loonie is limited as oil retreats in early US session. Canadian PPI dropped sharply by -2.6% mom in Nov, with yoy rate down from 9.5% to 5.9%.

Euro remains pressured across the board after release of lower than expected inflation reading fuels speculations of rate cut from ECB on Jan 15. Flash HICP estimate in Dec dropped more than expected from 2.1% to 1.6% yoy, versus consensus of 1.8%. This is the first time that inflation fell below ECB's 2% target since Aug 2007 and is the lowest rate in two years. Eurozone Services PMI for Dec is revised slightly higher to 42.1 but provides no support to the common currency.

On the other hand, Sterling is supported by unexpected improvement in Dec Services PMI from 40.1 to 40.2. Released earlier, Nationwide consumer confidence dropped to 47. Dec. Nationwide house price dropped more than expected by -2.5% mom, -15.9% yoy in Dec.

GBP/JPY Mid-Day Outlook

Daily Pivots: (S1) 134.16; (P) 135.85; (R1) 138.89; More

GBP/JPY's rally continues today and reaches as high as 138.21 so far. At this intraday remains on the upside as long as 135.39 minor support holds, targeting 139.19 resistance first. Break there will confirm that a short term bottom is at least in place at 129.71 after missing 129.32 key long term support. In such case, strong rally should be seen towards 165.02 key medium term resistance. On the downside, below 135.39 will turn intraday outlook neutral first but downside should be contained well above 129.71 low and bring rally resumption.

In the bigger picture, as mentioned before, the fall from 215.87 is treated as a five wave sequence (184.47, 197.42, 139.02, 165.02) and the fifth is expected to be contained by mentioned 128.92/129.32 support zone ( 61.8% projection of 197.42 to 139.02 from 165.02 at 128.92). We have noted that the diagonal triangle (or falling wedge) look of the fall from 165.02 as well as bullish convergence conditions in daily MACD and RSI are both supporting this case. Break of 139.19 resistance will confirm this case and strong rebound should then be seen towards first medium term resistance at 165.02 at least. On the downside, however, sustained break of 128.92/129.32 will pave the way to 100% projection target at 106.62.

Forex News Digest

• December U.S. ISM Non-Manufacturing Index Sees Upside Surprise
• U.S. Factory Orders Fall More than Expected in November
• Decline in U.S. Pending Home Sales Picks Up in November
• Morning Market Recap: Oil Rises to One-Month High
• German Services PMI Revised Up to 46.6 in December
• UK Services Sector Rebounds Slightly in December
• Euro Zone Inflation Slows to 1.6% Year-Over-Year, Euro Hits Session Lows
• Euro Zone Services PMI Falls to Series Low in December
• UK House Prices Fall Below Expectations in December, Nationwide Says
• Euro Falls to Three-Week Low Against Dollar as European Inflation Slows
• Dollar to Extend Near-Term Gains Versus Euro, Bank of Tokyo's Hardman Says
• Dollar to Climb Over Three-Month Horizon, Euro May Pare Gains, UBS Says
• Pound Rises Against Euro on Speculation U.K. Economy Will Rebound Faster
• Euro May Weaken to 87.50 British Pence on Charts, Standard Chartered Says

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