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/
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