Mid-Day Report: Markets Digest Recent Rally in Dollar and Yen

Yen and dollar turns sideway in early US session after strong rally earlier today. With no important economic data from US scheduled, some sideway trading might be seen in the currency markets in US session. But after all, further rally in dollar and yen is expected in general. Recovery in US stocks at the open is so far mildly and did nothing to change the near term bearish view. Falling commodity prices are providing additional support to dollar and yen. And the next main focus will be on Crude Oil Inventory report which could trigger volatility in oil and thus stocks and currencies indirectly.

In a report released today, IMF revised up global economic growth in 2010 from 1.9% to 2.5%. However, projected contraction this year was revised down from -1.4% to -1.3%. US is expected to contract -2.6% this year but to rebound 0.8% in 2010. Projection for Japan in 2010 was also revised up from 0.5% to 1.7%. Emerging markets are expected to grow 4.7% next year, up from prior forecast of 4.0%. Chief economist Olivier Blanchard said that "the global economy is still in a recession but we're inching towards a recovery," and the fiscal monetary and financial policies should be continued. Though, IMF also called on policy markets to plan for exiting the measures taken to lower inflation threats. IMF said that risks for sustained deflation risks are "small" even though outlook for global inflation "is expected to remain subdued through 2010, held back by significant excess capacity."

In the draft statement of G8 meeting, the leaders expressed that they have agreed on the need to "prepare appropriate" exit strategies once "recovery is assured. The exit strategies "will vary from country to country, depending on domestic economic conditions and public finances and to assure a sustainable recovery in the long term." There will be no specific paragraph on currencies.

On the data front, Eurozone Q1 GDP was finalized at -2.5% qoq, -4.9% yoy. Germany industrial production posted unexpected gain of 3.7% mom in May. UK Nationwide consumer confidence improved from 54 to 58 in Jun, BRC shop price index showed 0.7% gain in Jun. Halifax house price posted unexpected fall of -0.5% mom. Japanese current account surplus widened less then expected to 1.016T Yen in May but machine orders unexpectedly fell -3.0% mom. Australia Westpac consumer confidence deteriorated from 12.7% to 9.3% in Jul. Swiss unemployment rate climbed further from 3.5% to 3.8% in Jun versus consensus of 3.6%.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.6070; (P) 1.6182; (R1) 1.6249; More

Intraday bias in GBP/USD remains on the downside with 1.6293 minor resistance intact. Recent development is inline with the view that GBP/USD should have made an important top at 1.6742 with bearish divergence conditions in 4 hours MACD and RSI. Further decline should be seen to 1.5801 support next. While some initial support might be seen from medium term rising trend line (now at 1.5713), we'd expect GBP/USD to break through it eventually. On the upside, above 1.6293 minor resistance will turn intraday outlook neutral again and bring consolidation. But upside 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 broken its 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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