Mid-Day Report: Sterling Weighed Down by Dovish BoE

Sterling was weighed down by dovish BoE inflation report and comments from Governor Mervyn King and pared earlier gains. BoE King said that "although the MPC last week announced a pause in its program of asset purchases, it is far too soon to conclude that no more purchases will be needed," suggesting the bank might not be done with quantitative easing yet. The quarterly inflation report released today suggest that the bank will keep rates at record low of 0.5% until at least next year. Inflation is to peak at about 3.5% this year, before falling back underneath its 2.0% target level. BoE also revised down the growth forecasts to about 3.2% yoy in the second quarter of 2011, compared with about 4% previously.

Euro remains steady against dollar and yen, as supported by speculation of Greece rescue package. Germany has basically agreed to lead a rescue plan for Greece under EU framework. Finance Minister Wolfgang Schäuble told lawmakers that options for helping Greece extended beyond loan guarantees. Details should be finalized and announced on EU summit in Brussels tomorrow. Judging from the lack of momentum to send EUR/USD through 1.3852 resistance, we might see another selloff in the common currency as rumors later become news.

Focus will turn to Fed chairman Bernanke later today, who is set to outline the exit strategies today on his testimony before the House Financial Services Committee. So far, the main question is when and how Fed should start raising interest rates, which has been at a record low for more than a year already. In addition, focus will be on how Fed could eventually shrink the record $2.2T balance sheet.

On the data front, US trade deficit came in wider than expected at USD -40.2B in December. Canada trade deficit came in at CAD -0.2B. UK production data came in much stronger than expected. Industrial production rose 0.5% mom in December while manufacturing production rose 0.9% mom. Japan machine orders rose 20.1% mom in December and was just down -1.5% yoy. Domestic CGPI dropped -2.1% yoy in January. Australia Westpac consumer sentiment dropped -2.6% in February.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.5603; (P) 1.5675; (R1) 1.5788; More

GBP/USD falls sharply today after recovery was limited at 1.5763. The development argues that recovery from 1.5534 is possibly finished. Intraday bias is cautiously on the downside for the moment. Break of 1.5534 will confirm fall resumption for 100% projection of 1.6875 to 1.5829 from 1.6456 at 1.5410 next. On the upside, though, above 1.5763 will bring more consolidations first. Nevertheless, we'd still expect upside to be limited by 1.5849 resistance and bring another fall.

In the bigger picture, break of 1.5706 cluster support (38.2% retracement of 1.3503 to 1.7043 at 1.5691) confirmed our view that medium term rebound from 1.3503, which is treated as a correction to down trend from 2.1161, has completed at 1.7043 already. fall from there is tentatively treated as resumption of the down trend from 2.1161 and should target a new low below 1.3503. On the upside, break of 1.6456 resistance is needed to invalidate this view. Otherwise, medium term outlook will now remain bearish.

Economic Indicators Update

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