Sterling Looking to Retail Sales to Extend Recent Strength

Sterling remains firm after recent strong rally and is looking forward to a solid retail sales report to extend recent strength. UK retail sales are expected to have gained 0.5% mom in April following an increase of +0.3% in the previous month as the Easter holiday should have boosted spending. Retail indicators, such as CBI and BRC, suggested a good reading in April, too. On annual basis, the gauge should have gained +2.5%, better than +1.5% in March. Public sector new borrowing should have soared 6.5B pound in April following a 19.1B pound rise a month ago. M4 money supply is anticipate to have surged +0.5% mom in April (March: +0.2%) with a high rate of growth of lending to financial sector.

The rally in Sterling has been impressive this week as the pound accelerates after breaking 09 high against dollar. Sterling's strength is also apparent in crosses with EURGBP finally resumed decline from 0.9494 while GBP/CHF is now resuming the medium term rebound from 1.1511. GBP/AUD is also sharply higher above this months low of 1.9684. Technically speaking, while the current rally in the mentioned pairs is generally viewed as corrective in nature, some more near term strength is still expected before completing the correction.

PMI readings in the Eurozone and Germany should have improved further in May. Manufacturing PMI in the Eurozone is expected to have risen to 37.5 from 36.7 in April while that in Germany should come in at 37, compared with 35.4 a month ago, as driven by rising orders and fall inventories. For the services sector, PMI in the Eurozone is expected to have risen to 44 from 43.8 in April while that in Germany should come in at 44.2, compared with 43.8 a month ago.

In the US, initial jobless claims might have reduced to 630K for the week ended May 16 and this would bring the 4-week average to 627K. Leading indicators probably gained +0.6%, the first increase in almost a year and the sharpest gain in 4 years, in April as led improvement in consumer confidence and stabilization in jobless claims. The Philly Fed Survey should also have improved to -18 in May from -24.4 a month ago. Canada's wholesale sales probably contracted -0.8% mom in March after a -0.6% decline a month ago.

Dollar was sharply off yesterday after FOMC minutes revealed that the committee members had discussed on increasing the size of assets purchase. 2009 GDP forecasts were revised down to -2.0% to -1.3%, unemployment rate was revised up to 9.2% to 9.6%. Dollar index's break of 81.87 confirmed that whole decline from 89.62 has resumed and should now target 100% projection of 89.62 to 82.63 from 86.87 at 79.88. Nevertheless, we'd maintain that such decline is treated as either a correction to rise from 77.69, or being part of a large range consolidation pattern from 88.46. Hence, downside is expected to be contained above 77.69 low, possibly by 80 psychological level. On the upside, above 81.66 will turn intraday outlook neutral and bring consolidation. But break of 83.22 resistance is needed to be the first signal that dollar index has bottomed out. Otherwise, short term outlook remains bearish.

GBP/JPY Daily Outlook

Daily Pivots: (S1) 148.04; (P) 148.94; (R1) 150.35; More.

GBP/JPY edges higher to 149.92 today and at this point, intraday bias remains on the upside as long as 147.06 minor support holds. With trend line support intact, whole rally from 118.81 should be in progress and break of 150.86/151.49 resistance zone will confirm rally resumption towards 38.2% retracement of 215.87 to 118.81 at 155.88. On the downside, below 147.06 will turn intraday outlook neutral and bring pull back. But downside should be contained above 143.00 support and bring another rise.

In the bigger picture, there is no change in the view that rise from 118.81 is correction to medium term fall from 215.87 only. While such rise might extend further, it's still expected to conclude at 38.2% retracement of 215.87 to 118.81 at 155.88 and bring reversal. Below 138.99 support will indicate that such rebound has completed and the long term down trend from 251.09 is possibly resuming. In such case, we'd be looking forward to a break of 118.81 low eventually. However, note that sustained break of 155.88 fibo resistance will dampen this bearish view and set the stage for stronger rebound to 55 weeks EMA at 162.86 or further to 50% retracement at 167.34 next.

Dollar Resuming Down Trend, Sterling Breaks 09 High

Risk appetite continues to dominate today. Nikkei opened sharply higher, following 235 pts gain in DOW yesterday and soared to 9300 level and maintained gains to close 251 points up at 9290. Yen crosses also extend yesterday's strong broad based rebound while dollar is generally pressured. Commodity yen crosses, the usual suspect, are so far the biggest winners this week with AUD/JPY and NZD/JPY climbing around 4% while GBP/JPY and CAD/JPY climbing around 3%. Two developments to note. Firstly GBP/USD has taken out this year's high of 1.5371 while dollar's recovery since last week should have completed.

Building on risk appetite trades, Sterling extends recent rally against dollar and breaks this year high of 1.5371 in early European session. Current development argues that GBP/USD is probably heading to 1.60 level as next stop. In addition to stocks, today's CPI release from UK as well as MPC minutes, retail sales and Q1 GDP will probably trigger additional volatility in Sterling. Inflation in the UK should have continued easing in April from last year. CPI probably moderated to +2.4% yoy during the month from +2.9% in March while RPI contracted -1.1% yoy after falling -0.4% in March. The decline was led by drops in food, energy, alcohol and tobacco prices. Core CPI (excluding food, energy, alcohol and tobacco prices) may have eased to +1.6% yoy from +1.7% in March but upside risk is likely as the gauge has come in firmed than the expected recently. On monthly basis, CPI should have increased +0.4% in April from +0.2% a month ago as driven by weakness in the pound. RPI is anticipated to have gained +0.3% mom in April after staying flat in March.

Other data in European session include April's ZEW economic sentiment for Germany and the Eurozone as a whole likely improved further to 20 from 13 and 15 from 11.8 respectively as market confidence has obviously picked up after release of better economic data over the past few weeks.

On the other hand, dollar index's recovery should have completed with three waves up to 83.22,after hitting 4 hours 55 EMA. A test of 81.87 low is expected this week and break will confirm that whole decline from 89.62 has resumed for mentioned target of 100% projection of 89.62 to 82.63 from 86.87 at 79.88 before concluding the decline between 77.69 long term support and 80 psychological level. Markets will also look into new residential construction data from US today for triggering further rally in stock. NAHB housing market index released yesterday showed improvements from 14 to 16 in May and should point to some improvements in the new residential construction data. Housing starts should have increased to 520K units in April from 510K units in March as driven by stable single family starts and small increase in multifamily starts after the latter dropped by a sharp 28.6% in the previous month. Building permits probably also increased to 530K in April from 513K a month ago.

In Australia, RBA Governor Glenn Stevens said that Australia should weather the current recession better than other countries due the resilience of domestic banking sector. Moreover, global economic recovery will start late 2009 but the pace is slow in the beginning. In the RBA minutes for the meeting on May 5, the policymakers voted to keep interest rate unchanged as there had been improvement in confidence and economic activities, particularly in China. The board decided to monitor the impacts of the previous 425 bps reductions between September 2008 and April as well as the 2 fiscal stimulus packages worth $52B on economy. Japan's industrial production was confirmed at +1.6% mom (February: -9.4%) and -34.2% yoy (February: -36.9%) in March.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.5192; (P) 1.5270; (R1) 1.5423; More

GBP/USD rises sharply to as high as 1.5445 in early European session and the decisive break of 1.5371 resistance confirms that whole rally from 1.3654 has resumed. At this point, intraday bias remains on the upside and further further rally should be seen to next medium term resistance at 1.5722. On the downside, below 1.5290 minor support will turn intraday outlook neutral first but downside should be contained above 1.5054 support and bring rally resumption.

In the bigger picture, current rise from 1.3654 is treated as part of the consolidation that started at 1.3503, which is correcting whole medium term decline from 2.0158. Decisive break of 1.5371 resistance indicates that stronger rally is underway towards next key cluster resistance of 38.2% retracement of 2.0158 to 1.3503 at 1.6045 and 161.8% projection of 1.3503 to 1.4984 from 1.3654 at 1.6050. Nevertheless, we'd expect such consolidation to conclude there and bring medium term down trend resumption. Below 1.5054 support will now be the first alert that rise from 1.3654 has completed/

Looking for the Lost: the Shrinking American Consumer

Economic analysis anticipates the future through mathematical equations. If interest rates are reduced by a certain percentage then the economy can be expected to grow by x factor. The difficulty in accurate prediction arises from the assumptions disguised within the formulas. For the American consumer it is beginning to look like one of those basic assumptions has changed. The consumer that reliably spent most or all of his or her disposable income has become a cautious, price conscious shopper. Value and replacement rather than consumption and excess have become the bywords of the family budget.

If this change in consumer spending habits is permanent then predictions of economic growth based on an assumed level of consumer spending relative to income will overstate potential future GDP expansion. The government may send stimulus checks to the entire population but if the money is not spent the economy will not move.

Retails Sales without auto purchases have fallen in seven of the last nine reporting months. Since last August only January and February reported gains. In April they fell again shrinking 0.5%, a much weaker result than expected. The consumer who seemed to have returned in January and February after a terrible fourth quarter was in reality only taking advantage of the large discounts in post-Christmas sales.

The University of Michigan Consumer Sentiment numbers present, on the surface, a different picture. The overall reading has recovered more than 12 points since its November low; the ‘expectations’ result has regained more than 15 points. Both would seem to point to the type of recovery anticipated by economic models with consumers responding to the stimulus provided by low interest rates and government fiscal support of the economy.

However the ‘current condtions’ reading is far less positive than the headline numbers. It has recovered less from its nadir of last fall and has fallen again since January. In fact the ‘current conditions’ performance looks a lot like Retail Sales: after transitory gains in January and February the decline has returned.

When people are asked about what they expect for the future they respond based on the same types of assumptions that underpin economic models. After all they have been informed over and over again by the financial media that six months to a year after the Federal Reserve cuts rates the economy responds with growth. The stock market is widely regarded as a leading indicator presaging future growth and it has been rising since March. It may seem natural for survey responders to mimic these ideas in their replies.

But when the questions turn to registered facts, to the personal financial and economic condition of the respondent, the picture is far less sanguine. People are less confident about the future than the equities averages might suggest. Their spending decisions as recorded by sales figures are based on these personal pessimistic attitudes and not by the generally accepted notions of incipient economic recovery.

There has been a slow reduction of fear in all the financial markets so perhaps it is not unexpected to find that reflected in improving consumer attitudes. Few analysts expect the extreme volatility of September and October to return. There is plenty of remaining economic concern but it has turned to questions of GDP growth, tax policy and the potential of the US fiscal stimulus package. But diminution of fear should not be mistaken for equanimity about the future. Because consumers no longer expect the imminent collapse of the financial system does not mean the spending assumptions of two years ago will suddenly reassert themselves.

With the need for a haven currency ebbing, currency traders are resurrecting the normal criteria for currency comparison: interest rate cycles and economic growth. Interest rates are currently a dead letter. Even if central bankers were not fighting a worldwide recession, the specter of deflation, receding though it may be, is enough to insure low rates for the foreseeable future.

Most economic actors at any one time operate with a similar set of economic assumptions. The growth potential of the US economy based on the spending habits of the American consumer is the most questionable current assumption. The American consumer is under considerable long term economic stress, any GDP growth assumption that does not recognize this new fact is dubious at best.

A split has developed between what consumers say and what they do. Like the econometric models that assume a level of consumption relative to income that may no longer be valid, so consumers may be anticipating a recovery based on ideas that their own changed behavior has invalidated.

Broad Based Strong Rebound in Yen, Pivotal Week Ahead

The strong, broad based rally in the Japanese yen left investors wondering whether financial markets are turning around. Yen's strength was impressive considering a) the head and shoulder top in USD/JPY, b) single week reversals and outside bars in EUR/JPY, AUD/JPY, NZD/JPY and CAD/JPY as well as c) the fact that yen crosses has given up earlier gains this month. It should be very highly that yen crosses have seen this month's highs already and should be spending the time head making the monthly bars' lows. But the main question is, are they reversing? Is it the start of a new down trend? Or it is just a pull back?

Stocks in US were sent lower by banks' stock offerings after the stress test results, including Wells Fargo, Morgan Stanley, BB&T, Capital One, US Bancorp and Key Corp, to raise over $19b of capital. . In addition to banks, Ford planed to raise $1.6b by selling 300m common shares. Investors are also concerned with massive US auto dealership closures and the potential bankruptcy of the top US automaker. Stock markets also responded negatively to news that both headline and ex-auto retail sales in US unexpectedly dropped for the second consecutive months in Apr.

News elsewhere was not positive at all. Quarterly Inflation Report released from BoE last week was rather dovish. Governor Mervyn King said that the economy will probably face a "slow" and "protracted" recovery. GDP is expected to trough at -4.5% in Q2 before resuming growth in early 2010, and hit around 2.5% growth in two years' time. But the outlook of growth is "unusually uncertain." Inflation will probably trough at around 0.5% in Q4 of 2009 but stay below the 2% target before 2012.

The Eurozone's GDP contracted -2.5% qoq in 1Q09, the largest decline in 15 year, after dropping -1.6% in the previous quarter. The reading was worse than consensus of -2% as companies reduced output and jobs amid the deepest recession since World War II. Economies in both Germany and Italy reached record low during the quarter. On annual basis, the gauge declined -4.6%, also worse than market expectation of -4.1% and -1.4% in 4Q08. On the other hand, headline CPI, gaining +0.6% yoy in April, was inline with market estimate while core reading rose +1.7% on annual basis, compared with +1.6% in consensus and the downwardly revised +1.4% in March.

So coming back to the question, was investors' optimism about recovery fading and have stocks topped? Is it the start of another round of risk aversion trades in the forex markets too? Looking at DOW, while it did drop over 300pts to 8268 last week, it is still staying inside a near term rising channel. In addition, it's trying to draw support from the 4 hours 55 EMA, which has been holding well since March. It's a pre-mature to conclude that stocks has topped. Also, consider that, the credit market continued to be unfreeze with Libor for three-month loans in dollar dropped further to new low of 0.83 while TED spread dropped to the lowest level since Aug 07 at 67bps. Some more rally in stocks might still be seen.

Nevertheless, note bearish divergence condition in the 4 hours MACD in DOW which indicates diminishing upside momentum. A break of this month's open/last month's close at 8167/68 will also have the near term channel taken out. Such development will strongly suggest that the rebound since early March has topped out and will turn outlook bearish in stocks.

Outlook in yes crosses are similar. With the except of USD/JPY, which completed a head and shoulder top, AUD/JPY, NZD/JPY, CAD/JPY and even GBP/JPY are all still holding above near term trendline support and thus, there is no confirmation of reversal yet. Though, upside momentum is clearly diminishing and the trend looks vulnerable. This week might prove the pivotal week to determine the larger trend and close attention will be paid to these levels in yen crosses as well as development in stocks.

While dollar tumbled against yen, it benefited from even deeper fall in other yen crosses and climbed against most major currencies last week. Dollar index also recovered impressively to as high as 83.09 to close the week strongly. Nevertheless, we're still expecting some strong resistance in between 83.50 and 84.46 resistance zone and bring another fall. However, a strong break above 84.46 will be an important indication that fall from 86.87 has completed and whole decline from 89.62 has completed and will have short term outlook turned bullish.

Currency Heat Map Weekly View

	USD	EUR	JPY	GBP	CHF	CAD	AUD
USD
EUR
JPY
GBP

The Week Ahead

Main focus will be on whether stocks will complete the 'correction' or will it extend last week's decline. Another focus will be on any follow up reactions on Swiss Franc after the spike low on news SNB intervention.

Calendar in US is relatively light this week with focus on FOMC minutes, NAHB Housing Market Index and new residential construction as well as Philly Fed index and leading indicators. Attention will also be paid to speeches from Treasury Geithner and Fed Bernanke.

From Eurozone, Main focus will be on German ZEW, and Eurozone PMIs. Trade balance will also be released.

Calendar in Japan is busy with a string of economic data including Q1 GDP, consumer confidence, industrial production, Tertiary industry index, leading indicator and BoJ rate decision (which is expected to be on hold at 0.1%).

It will be another important week in UK with CPI, retail sales and Q1 GDP featured in addition to BoE Minutes.

Other economic data include Swiss ZEW, RBA minutes, Canadian CPI and retail sales, and New Zealand PPI.

USD/JPY Weekly Outlook

USD/JPY's steep decline last week and break of 95.61 support affirmed our view that whole rise from 87.12 has completed with a head and shoulder top reversal pattern (ls: 99.67, h: 101.43, rs: 99.71). Initial bias remains on the downside this week for 61.8% retracement of 87.12 to 101.43 at 92.58 and break will target 87.12. On the upside, above 96.16 will suggests that a short term bottom might be in place and bring consolidation. But upside should be limited below 97.83 resistance and bring fall resumption.

In the bigger picture, medium term outlook in USD/JPY remains bearish as USD/JPY is still limited well below trend line resistance (124.13 to 101.65) as well as 55 weeks EMA. Rise from 87.12, which is treated as a correction in the down trend from 124.13, should have completed with bearish divergence condition in daily MACD and RSI, with a head and shoulder top pattern. Further decline should now be seen to retest 87.12 low first. Break there will confirm down trend resumption for next key support level at 79.75 (95 low). On the upside, though, above 87.83 will argue that price actions from 99.67 might be forming a triangle consolidation only and rise from 87.12 has not completed yet.

In the long term picture, price actions that started from 79.75 (95 low) has completed in form of a triangle that ended with five waves to 124.13. In other words fall from 124.13 is just part of an even larger scale down trend. Such fall from 124.13 is expected extend to retest 79.75 low at least. Break of 110.66 is needed to invalidate the long term bearish view.

News Alert for 05/13 UK Inflation Reprot & US Retail Sales

5:30am UK BOE Inflation Report / BOE Gov. King Speaks
8:30am US Core Retail Sales 0.1%(E) -1.0%(P) 0.5%(S) 50M

E = Expected
P = Previous
S = Surprise Factor
M = Expected Movement in Pips if surprise factor is reached

***

NEWS TRADING

Wednesday May 13, 2009

[5:30am NY Time]

UK BOE King Speaks / BOE Inflation Report

Governor King will host a press conference immediately after the
release of it's quarterly Inflation report which provides valuable
views on future monetary policy and future outlook of UK's economy.

This report is usually high impact as the market get first hand
information on BOE's projection for next two years of economic
growth.

I will recommend to wait for the release and then follow market
sentiment immediately after the release. Most likely if the market
is genuine surprised by this report, the impact could last for
several hours to several sessions, therefore a "Wait-and-see" type
of attitude should be key to trade this report.

[8:30am NY Time]

US Retail Sales Core BUY -0.4% SELL 0.6% EUR/USD

Since we have both retail sales coming out at 8:30am, we have to
make sure there is no conflict with the numbers between the headline
and core releases.

Here is the Definition from ForexFactory:

(Retail Sales Core)
Derivative of Retail Sales that excludes the Automobile Sales
component. Automobile Sales make up roughly 25% of Retail Sales,
but they can be very volatile from month to month and can distort
the picture. Retail Sales with the exclusion of this volatile
component is thought to be a better indicator of the underlying
trend in consumer spending.

(Special Message on Fundamental News Trading)

Currency Market is driven by fundamental news. News releases are
what determines the long term and short term trends of the market.
Although technical analysis has its part in Forex trading, it is
important to understand that market does not move just because a
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the mid to long term.

If you like to learn more on how to take advantage of fundamentals
in your trading, please download a copy of my E-Book: Definitive
Guide to Fundamental News Trading.

(Special Message on Fundamental News Trading)

Currency Market is driven by fundamental news. News releases are
what determines the long term and short term trends of the market.
Although technical analysis has its part in Forex trading, it is
important to understand that market does not move just because a
technical breakout or a candlestick pattern. By understanding
fundamentals, a trader will have a powerful edge over the market in
the mid to long term.

If you like to learn more on how to take advantage of fundamentals
in your trading, please download a copy of my E-Book: Definitive
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Daily Forex Analisys for May 13, 2009

Here's what's NEW at our Daily Forex Analysis over the past few hours. Your comments and feedback are always welcome.

Daily Forex Analysis for May 13, 2009 - 10:31 am GMT+7 (Indonesia Time - Jakarta)
EUR/USD
It is more likely to go down to 1.35 area, but may be it will hit once again in around 1.37, and then go down. We can place a sell order at around 1.3720. with (...)
(Read more at: http://gainscope.com/forex/daily-forex-analysis-for-may-13-2009/ )

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Featured Technical Report

Featured Technical Report

EUR/GBP Daily Outlook Daily Pivots: (S1) 0.8894; (P) 0.8955; (R1) 0.8995; More EUR/GBP draws some support from 4 hours 55 EMA and recovers mildly today. But after all, outlook remains rather mixed as it's unclear whether decline from 0.9494 has completed at 0.8763 already even though bullish convergence condition in 4 hours MACD is suggesting so. We'd prefer to see a break out of range of 0.8763/9080 before concluding. On the upside, break of 0.9080 resistance will indicate that whole decline from 0.9494 has completed at 0.8763 already. In such case, strong rally should be seen towards trend line resistance at 0.9282 next. On the downside, below 0.8763 will suggest that fall from 0.9494 is indeed still in progress to 0.8635 support and below before completion. Read more... All Technical Outlook Reports EURUSD Technical Outlook USDJPY Technical Outlook GBPUSD Technical Outlook USDCHF Technical Outlook USDCAD Technical Outlook AUDUSD Technical Outlook EURJPY Technical Outlook EURGBP Technical Outlook EURCHF Technical Outlook GBPJPY Technical Outlook

Action Insight Daily Report

Sterling Mixed ahead of BoE Quarterly Inflation Report

Sterling strengthens mildly against dollar but remains rather mixed elsewhere ahead of BoE Quarterly Inflation Report today. Recent economic data from UK, suggest that the worst in the economic downturn might be over. However, it's rather unlikely that the report will deliver a brighter tone just after BoE has extended its quantitative easing program last week. Markets opinion are quite divided on how BoE will revise growth and inflation projection data. And based on that, any revision could trigger strong volatility in the markets.

Full Report Here...

GBP/JPY Candlesticks and Ichimoku Analysis

Although the British pound rose marginally to 150.90 as expected, as sterling has retreated after faltering below indicated resistance at 151.53, suggesting initial consolidation below this level would take place and pullback to 144.96 (61.8% fibo. retracement of 139.03-150.90) is likely, however, renewed buying interest shall emerge around Tenkan-Sen (now at 143.24) and yield another upmove later. Break of 150.90 would signal the rise from 118.87 has resumed for re-test of 151.53, above there would bring retracement of medium term decline from 215.89 to 153.50, then 155.93, being 38.2% fibo. retracement of the fall from 215.89 to 118.87.

Full Report Here...