Mid-Day Report: No Surprise from BoE, Sterling Resumes Rebound

Sterling resumes recent rebound after BoE delivered a 50bps rate cut as markets expected. The bank left the door open for further policy easing as it noted a "significant risk of undershooting the 2% CPI inflation target in the medium term at the existing level of Bank Rate" in the accompanying statement. BoE note that "pace of contraction in activity increased during the fourth quarter of 2008 and that output is likely to continue to fall sharply during the first part of this year." There is also need to "increase the flow of lending to the non-financial sector." Though, recent depreciation of Sterling may help to moderate impact from global slowdown. Focus will turn to minutes to be released on Jan 21.

As mentioned before, markets already priced in the possibility of ZIRP and deepened recession in UK in the sharp down trend of Sterling in recent months. Short positions are being closed for profit taking as such expectation is gradually becoming facts. Meanwhile, Sterling is lifted in cross activities against Euro and anticipation that ECB is catching up with other central banks of the world for further policy easing.

EUR/GBP dives to as low as 0.8894 after BoE's announcement. Sustained break of 0.9 psychological support (with 50% retracement of 0.8234 to 0.9798 at 0.9016) argues that 0.9799 is indeed a medium term top and focus now turns to trend line support at 0.8758. Break will confirm that whole rally from 0.7963 has completed and will open up the case for deeper decline towards next important medium term support at 0.8234.

Elsewhere, the Japanese yen is seen generally higher on risk aversion following weakness in global stock markets. Yesterday's ADP employment report raised concern of a very poor Non-Farm Payroll and unemployment rate figures tomorrow and triggered weakness in the global stock markets. The anticipated stock rally in early Jan might be shorter than originally expected but as long as DOW stays above 8367, upside of yen could be limited. However, a break of 8367 will likely trigger massive risk aversion trades that pushes yen higher and commodity currencies lower.

Also, Swiss Franc is mildly firmer against dollar and Euro on news that Lebanon fired at least three rockets into Israel. Geopolitical tension might give Swiss Franc another lift if the situation escalates. Note that EUR/CHF's recovery might be completed at 1.5143 after failing to sustain above 4 hours 55 EMA. Risk is now on the downside for EUR/CHF to retest 1.4753 low first.

On the data front, US jobless remains below 500k for another week, at 467k. Switzerland's unemployment rate rose to 2.8% in December, inline with market expectation. CPI contracted -0.5% mom in December, after falling -0.7% in the previous month. On annual basis, inflation rose merely by 0.7%, the lowest yearly growth ever. Eurozone business climate hit record low of -3.17 in December. Also, consumer confidence plunged to 23-year low at -30. Final 3Q08 GDP was unrevised at -0.2% mom, 0.6% yoy. Unemployment rate rose to 7.8%, the highest since December 08, in November. In Germany, December's trade surplus narrowed to 9.7B euro, lower than consensus of 14.5B euro and revised 16.4B euro in October because contraction in export (-10.6%) is much faster than decline in import (-5.6%). Moreover, the country's current account in November dropped to 8.6B euro from revised 14.3B euro in November.

EUR/JPY Mid-Day Outlook

Daily Pivots: (S1) 125.48; (P) 126.57; (R1) 127.49; More.

EUR/JPY dives to as low as 124.09 today and the break of inner trend line support serves as another indicate that rise from 115.88 has completed. At this point, intraday bias is on the downside as long as 127.63 resistance holds. Break of 123.69 will affirm the case that rise from 115.88, which is treated as third leg of consolidation from 113.63, is completed after touching 131.02 resistance. Deeper fall should then be seen to 115.88 support first. On the upside, though above 127.63 will dampen this view and suggest that another rise to retest 131.03 could be seen before topping.

In the bigger picture, whole decline from 169.96 is expected to develop into a five wave sequence, with first wave completed at 147.03, second at 156.84, third at 113.63. Price actions from 113.63 is treated as the fourth wave consolidation. Having said that, upside of such consolidation is expected to be limited below 141.73 cluster resistance (50% retracement of 169.96 to 113.63 at 141.79). Break of 113.63 will confirm that whole down trend has resumed for 76.4% retracement of 88.97 to 169.96 at 108.08.

Forex News Digest

• German Factory Orders Fall Below Expectations in November
• European Market Recap: Bonds Mixed, Equities Lower on Low Economic Sentiment
• Euro Zone Economy Confirmed to Have Contracted 0.2% in Q3, Eurostat Says
• Euro Zone Jobless Rate Rises to 7.8% as Expected in November
• Euro Zone Economic Confidence Hits Rock Bottom in December
• Swiss Inflation Slows to 0.7% Year-Over-Year in December
• German Trade Surplus Falls Unexpectedly to €9.7 Billion in November
• Swiss Unemployment Rises Above Expectations in December
• BOE Reduces Interest Rate to Lowest Since Central Bank's Creation in 1694
• Yen Advances as Falling Stocks and Israeli Conflict Increase Risk Aversion
• Australian, New Zealand Dollars Decline on Commodities, U.S. Jobs Report
• British Pound Gains After Bank of England Cuts Main Rate to 1.50 Percent
• Pound May Rise to $1.5724 on Close Above $1.5165, Citigroup Chart Shows

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