Mid-Day Report: Dollar Mildly Higher ahead of FOMC, Rates Projection Awaited

Dollar is mildly firmer today on risk aversion as traders are awaiting the FOMC meeting. Fed is widely expected to keep rates and the quantitative easing program unchanged. Nonetheless, today's meeting will market a historical change in Fed communications. A main focus is the new fed fund rates projection based on individual member's forecast. Fed released two templates of the charts last week which should show when FOMC members expect to have the first rate hike, and expectation of the target rate of at the end of the next three years and the longer run. The projections could show the first hike at end of 2013. Next in Asian session, RBNZ is expected to announce unchanged interest rates at 2.50%.

Sterling pares much of this week's gain against dollar after data showed GDP contracted more than expected by -0.2% qoq in Q4, versus consensus of -0.1%. This also followed 0.6% qoq expansion in Q3. Production dropped sharply by -1.1% while construction also contracted -0.5% and, services were flat. All showed sharp deterioration in the quarter. There are talk that UK economy is slipping back into a mild recession in 2012 with risks on the downside, and today's data affirm this expectation. BoE minutes of January 12 meeting was also released today, showing that policy makers voted unanimously to keep policy and unchanged. However, for some members, "the risk of undershooting the target meant that a further expansion of asset purchases was likely to be required." But, for some members, "the risks to inflation were more finely balanced and it was less clear that inflation would fall below the target in the medium term."

ECB Executive Board member Gonzalez-Paramo said that since December, "market psychology has begun to change" and the slowdown in the economy is just temporary. He also said bond purchase is not equivalent to QE, but targeted at excessive volatility in government bonds. IMF chief Lagarde said combining the temporary EFSF and the permanent ESM would "send a very strong sign of confidence in Europe". German Ifo business climate rose slightly more than expected to 108.3 in January, current assessment component dropped to 116.3 while expectations component improved to 100.9. The steering committee of Greece's private credits, co-chaired by IIF chief Dallara, is in Paris meeting to "determine the next course ahead", facing pressures

The Japanese Yen's sell off continues today after the country unexpectedly reported deficit of JPY -0.57T in December. More importantly, Japan posted its first annual trade deficit since 1980, that is, over 30 years. In 2011, deficit was at JPY 2.49T after 2.7% decline in export to JPY 65.55T. On the other hand, import surged 12.0%. That's a result of yen's strength which erode Japan's export competitiveness. BoJ governor Shirakawa said yesterday that trade deficit is not a pattern and he doesn't expect current account balance to turn to deficit in the near future. However, there are some concerns that the current account balance would eventually turn into deficit should trade deficit continues to widen on slowing global demand and strong competition. Some economists expect that to happen at around 2016/17. And when that happens, Japan would no longer be able to pay the cost of it's public debt.

Australian dollar strengthened today on risk appetite and also helped by mixed inflation data. headline CPI did moderated to 3.1% yoy in Q4. However, RBA's weight median CPI was unchanged at 2.6% yoy versus expectation of 2.4% yoy. Trimmed mean CPI even accelerated to 2.6% yoy versus expectation of 2.4% yoy. The stronger than expected core inflation reading is now above the mid-point of RBA's target range of 2-3% and markets are now pricing in only around 50% chance RBA would cut again in February.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.5562; (P) 1.5594; (R1) 1.5655; More.

The break 1.5533 minor support suggests that a temporary top is at least formed. Also the corrective rebound from 1.5234 might be completed at 1.5627 too. Intraday bias is flipped back to the downside for 4 hours 55 EMA (now at 1.5494). Sustained break there will affirm this case and target a test on 1.5234 low first. On the upside, above 1.5627 will bring another rise. But still, we'd stay bearish as long as 1.5773 resistance holds and favor eventual fall resumption for below 1.5234.

In the bigger picture, price actions from 1.3503 are treated as consolidations to long term down trend from 2.1161. At this point, we're favoring the case that such consolidation is either finished with three waves to 1.6746, or five waves as a triangle at 1.6165. Deeper decline is in favor to 1.4229 key support and decisive break there should extend the long term down trend through 1.3503 low. Meanwhile, strong rebound ahead of 1.4229, or a break of 1.6165, will dampen the immediate bearish view and extend the consolidation from 1.3503 instead.

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