Mid-Day Report: Sterling Soars on Banking News

News of banks is the main driving force behind financial markets today. In short, Asian and European stocks are generally are on news that the US taxpayers may increase its stakes in Citigroup to up to 40% and US stocks are set to open higher. While yen is the obvious loser today, Sterling is indeed the bigger winner, riding on strength in bank stocks. Chancellor of the Exchequer Alistair Darling ordered Northern Rock to expand mortgage lending by 14 billion pounds, the first in a series of measures due this week to revive the U.K. banking industry. Royal Bank of Scotland is believed to split into two units and scale back investment banking.

Speaking at a conference, ECB Trichet said that the financial systems remain under "severe strain" and the current recession is even putting further pressure on the financial system. He also called for extending regulation and oversight to "all systemically important institutions" and added that ECB has the technical capacity to take on a greater supervisory role

Economic calendar is light today. Canadian retail sales came in much worse than expected by falling -5.4% mom in Dec versus consensus of -2.4%. Ex-auto sales also contracted sharply by -3.2% mom versus expectation of -1.5%. USD/CAD recovers strongly after initial dive but remains in range. There is still no confirmation that the multi month consolidation that started at 1.3015 has completed.

EUR/GBP Mid-Day Outlook

Daily Pivots: (S1) 0.8816; (P) 0.8868; (R1) 0.8939; More

EUR/GBP's break of 0.8772 support reaffirms that case that fall from 0.9071 is still in progress. Further decline is expected to retest 0.8635 low first. Break will also confirm that whole fall from 0.9799 has resumed towards key medium term support zone of 0.8186/8234. On the upside, above 0.8920 will turn out look mixed again. But after all, with 0.9082 cluster resistance intact (38.2% retracement of 0.9799 to 0.8635 at 0.9080), decline from 0.9799 is likely still in progress.

In the bigger picture, note that rise from 0.7693 has completed with five waves up to 0.9799 (0.8195, 0.7808, 0.8660, 0.8234, 0.9799). More importantly, whole medium term rise from 0.6535 has probably completed the five wave sequence too (0.6867, 0.6678, 0.8186,. 0.7693. 0.9799). Hence, no matter how the consolidation from 0.9799 will develop into, decisive break of this resistance is needed to confirm up trend resumption. Otherwise, medium term outlook will remain neutral at best, with risk of fall to 0.8186/8234 (50% retracement of 0.6535 to 0.9799 at 0.8167) before completing the consolidation.

Forex News Digest

• ECB's Gonzalez-Paramo Says Inflation Expectations are Anchored
• EU May Need to Extend Aid to Individual Members, Says Almunia
• ECB's Trichet Sees Falling Credit Flows, "Severe" Strain In Financial System
• U.S. Government May Acquire Large Stake in Citigroup, Report Says
• Bringing Down Financial House With Credit Default Swaps May Weaken Yen Too
• Japanese Yen Declines on Speculation U.S. to Raise Its Stake in Citigroup
• Bernanke Offers Growth Without Jobs as Dream of Humphrey-Hawkins Law Fades
• UBS Says It's Positive on Dollar Over Three Months, Advises Selling Euro
• Darling Orders Northern Rock to Increase Mortgage Lending by $20 Billion
• Pound Gains to Highest in Almost Two Weeks as Stocks Advance on Bank Plans
• Australian, N.Z. Dollars Gain on Speculation U.S. to Raise Citigroup Stake

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