Mid-Day Report: Sterling Tumbles after BoE Minutes, Euro Directionless

Sterling was sold off sharply earlier today after BoE minutes unexpectedly revealed that two policy makers favored more expansion in the asset purchase program. GBP/USD is back pressing 1.57 level while EUR/GBP jumped through 0.84. Elsewhere, Euro is generally soft as Eurozone PMIs disappointed. Weakness in European equities also exerted some pressures on Aussie which limited AUD/USD's recovery below 1.07 level. Meanwhile, Yen's weakness continues as USD/JPY is staying firm above 80 psychological level.

The BOE minutes for the February meeting unveiled that 2 (Adam Posen and David Miles) out of 9 members opted for more expansion in asset purchases than decided. The 2 dissenters to the current monetary policy saw a risk of a prolonged period of depressed demand which would cause inflation to fall materially below target in the medium-term. Also, the expected that further easing would alleviate the risks of increasing unemployment. The news raised speculations that the central may increase the amount of asset buying in May. More in BOE Minutes Unveiled 2 Member Favored More Asset Purchases.

Eurozone PMIs were generally disappointing in February. The region's manufacturing PMI rose to 49 in February, below expectation of 49.4 and stayed below 50. Services PMI unexpected dropped below 50 level to 49.4. German Manufacturing PMI unexpectedly deteriorated to 50.1 while services PMI also deteriorated to 52.6. French Manufacturing was the bright spot though, improving to 50.2 but services PMI dropped to 50.3. Overall, Euro is bounded in tight range as markets became directionless after Greek deal approval.

USD/JPY continues to stay firmly above 80 level on broad based weakness in the Japanese yen. BoJ's ultra easing monetary policy is factor that contributes to recent weakness in the Japanese yen and is there to stay. Another yen selling reason emerged earlier this week after Japan posted record trade deficit in January, with steep fall in exports to China. Meanwhile, as an oil import country and an export led economy, Japan is facing additional pressure from recent rally in oil prices. After, last year's natural disaster in Japan, only 5 out of 54 nuclear reactors are staying in operation and thus increasing the demand for energy imports. This, coupled by strength in oil prices will likely worsen the trade balance of the country. WTI looks likely to test 114/115 level in near term based on current momentum and that could help take USD/JPY towards 85 level.

The break of 1.4335 confirms that GBP/CHF's fall from 1.4800 has resumed. The current development suggests that a short term top is at least formed at 1.4800 on bearish divergence condition in daily MACD. Deeper decline should be seen back to 38.2% retracement of 1.1464 to 1.4800 at 1.3526. On the upside, break of 1.4595 resistance is needed to signal near term bottoming. Otherwise, we'll stay bearish in the cross.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.5745; (P) 1.5804; (R1) 1.5837; More...

GBP/USD dropped sharply to as low as 1.5679 today so far but remains bounded in range of 1.5643/5928. Intraday bias remains neutral. Again, note that 1.6165 key cluster resistance (61.8% retracement of 1.6746 to 1.5234 at 1.6168) remains intact. Thus, there is no confirmation of completion of fall from 1.6746. Below 1.5643 will flip bias back to the downside for 1.5234. On the upside, above 1.5928 will extend the rebound from 1.5234 towards 1.6165 key resistance.

In the bigger picture, price actions from 1.3503 are treated as consolidations to long term down trend from 2.1161, no change in this view. Recent development, with lack of sustained selling, dampened the bearish view that such consolidation is completed. We'll turn neutral first. On the upside, break of 1.6165 will favor that such consolidation is going to extend with another rise. But strong resistance should be seen at 50% retracement of 2.1161 to 1.3503 at 1.7332 to limit upside to conclude the consolidation. On the downside, below 1.5234 will revive the case that such consolidation is completed and bring deeper fall to 1.4229 support for confirmation.

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