Mid-Day Report: Sterling Dives on Dovish King

Market Overview | Written by ActionForex.com | Aug 13 08 12:47 GMT |

Sterling is sold off sharply across the board after markets are confirmed of the risk in recession in UK. Quarterly Inflation Report from BoE released today showed the bank significantly revised down growth forecasts on 2009 Q1 from 1% yoy to 0.1% yoy. BoE Governor King mentioned in the press conference that "broadly flat output means there is a possibility of a quarter or two of negative growth." When asked about the risks of first recession since 1991, Governor admitted that there are clearly "downside risks". Regarding inflation, the report said that the current record inflation is temporary and should fall back to the bank's 2% target in two years if interest rates remains unchanged at the current 5%. The reports are clearly dovish and there has been growing speculation that once inflation risks recede, the next move from BoE will be a cut and could be a sharp cut to stimulate the economy. Employment report released from UK today adds further pressure on Sterling. Unemployment rate climbed more than expected to 5.4% in Jun. Claimant count had the biggest increase since Dec 92 in Jul and jumped 20.1k to 864.7k. Technically speaking, the GBP/USD dives through a key long term trend line support today, reaffirming medium term weakness. GBP/JPY's recent development also confirms that medium term rebound has already completed in Jul and is set to retest 192 level. Elsewhere, markets have little reaction to US retail sales report released today. Headline sales dropped -0.1% mom in Jul, inline with expectation. Ex-auto sales climbed 0.4%, below consensus of 0.5%. Import price index rose 1.7% mom, 21.6% yoy in Jul. Other data released today saw Eurozone industrial production flat mom in Jun and dropped -0.5% yoy, worse than expected. Japan Q2 GDP dropped by -0.6% qoq, -2.4% yoy following downward revision in Q1. Current account surplus widened to 493.9b. Trade surplus shrank to 252.1B. GBP/USD Mid-Day Outlook Daily Pivots: (S1) 1.8905; (P) 1.9013; (R1) 1.9074; More Cable dives through mentioned long term trend line support (now at 1.8937) today and reaches as low as 1.8736 so far. At this point, further decline is still expected as long as 1.9037 minor resistance holds. Sustained trading below the trend line now encourages deeper fall to next target of 100% projection of 2.1161 to 1.9337 from 2.0158 at 1.8360. On the upside, though, above 1.9037 will argue that cable has finally made a short term bottom after drawing support from the trend line and bring rebound towards 4 hours 55 EMA (now at 1.9337) before staging another fall. In the bigger picture, medium term fall from 2.1161 (07 high) is still progress. Note that bearish divergence conditions in monthly MACD and RSI argue that the whole up trend from 1.3680 (01 low) has also topped out at 2.1161 too. Break of the mentioned long term trend line line support (01 low of 1.3680, 05 low of 1.7047, now near to1.89 region) adds more credence to this case. Focus is now on next important cluster support at 1.8303/60 (100% projection of 2.1161 to 1.9337 from 2.0158 at 1.8360 and 38.2% retracement of 1.3680 to 2.1161 at 1.8303). On the upside, while strong rebound might be seen, a break of 2.0158 resistance is still needed to indicate fall from 2.1161 has completed. Otherwise, another fall should still be seen after correction.

Economic Indicators Update

GMT	Ccy	Events	Actual	Consensus	Previous	Revised
23:50	JPY	Japan GDP Q/Q Q2	-0.60%	-0.60%	1.00%	0.80%
23:50	JPY	Japan GDP annualised Q2	-2.40%	-2.30%	4.00%	3.20%
23:50	JPY	Japan GDP deflator Y/Y Q2	-1.60%	-1.50%	-1.50%
23:50	JPY	Japan Current account Jun	493.9B	490.2B	2000.8B
23:50	JPY	Japan Trade balance (jpy) Jun	252.1B	293.6B	529.4B
00:30	AUD	AU W'pac consumer confi. Aug	9.10%	N/A	-6.70%
08:30	GBP	U.K. Claimant count Jul	2.70%	2.60%	2.60%
08:30	GBP	U.K. ILO unemployment rate Jun	5.40%	5.30%	5.20%
08:30	GBP	U.K. Avg. earnings 3m Y/Y Jun	3.40%	3.60%	3.80%
09:00	EUR	Eurozone Ind'l prod'n M/M Jun	0.00%	0.10%	-1.90%	-1.80%
09:00	EUR	Eurozone Ind'l prod'n Y/Y Jun	-0.50%	0.40%	-0.60%	-0.40%
09:30	GBP	BOE Quaterly Inflation Report
12:30	USD	U.S. Retail sales M/M Jul	-0.10%	-0.10%	0.10%	0.30%
12:30	USD	U.S. Retail sales less auto M/M Jul	0.40%	0.50%	0.80%	0.90%
12:30	USD	U.S. Import price index M/M Jul	1.70%	1.00%	2.60%	2.90%
12:30	USD	U.S. Import price index Y/Y Jul	21.60%	20.90%	20.50%	21.10%
14:00	USD	U.S. Business inventories Jun		0.50%	0.30%