In BoE's Quarterly Bulletin, the bank said that savers in surplus countries may become more reluctant over time to invest funds in deficit-country government bonds and that would probably raise borrowing costs in deficit countries. That is, bond yields in deficit countries like UK and US may rise. UK's trade deficit was narrowed since hitting a record in September 2007, thanks to depreciation in the pound. The bank said that such depreciation maybe a part of a more prolonged process of rebalancing of the UKI economy, generating a fall in the long-run sustainable real exchange rate. The pound remains weak across the board today and is extending recent fall against most major currencies.

Dollar extends recent recovery as traders are paring short positions ahead of Wednesday's FOMC announcement. There were some speculations that Fed will hint on withdrawal from quantitative easing measures in the accompanying statement. The greenback is also helped by mild retreat in crude oil and gold. USD/JPY is in particular strong, helped by comments from economists that BoJ will be the only G10 central banks that's not raising rates in 2010 due to deteriorated economic outlook. USD/JPY is drawing support from the medium term channel that started in April from 101.43 and rebounded from 90.12. Nevertheless, there is no confirmation of reversal yet as long as 93.29 resistance holds.

Looking at the dollar index, rebound from 76.03 extends further today and is pressing 4 hours 55 EMA currently. As noted before, with bullish convergence conditions in 4 hours MACD and RSI, the index might have bottomed out at 76.03 already. But there is no confirmation yet. Focus will be on 77.24 resistance and break there will affirm the case that recent fall has completed, which is in line with our view that whole decline from March high of 89.96 will conclude near to 75.89 key support. In such case, outlook will turn cautiously bullish for 78.93 for confirming that dollar index has bottomed in medium term.


GBP/USD Daily Outlook

Daily Pivots: (S1) 1.6182; (P) 1.6318; (R1) 1.6405; More

GBP/USD's decline extends further today and reaches as low as 1.6147 so far. At this point, intraday bias remains on the downside and further decline should be seen to 1.6111 support. Break there will complete a head and shoulder top reversal pattern and will bring deeper fall to 100% projection of 1.7043 to 1.6111 from 1.6740 at 1.5805 next. On the upside, above 1.6278 minor resistance will turn intraday outlook neutral and bring recovery. But upside should be limited by 1.6402 support turned resistance and bring fall resumption.

In the bigger picture, the development is so far consistent with our preferred case that medium term corrective rise from 1.3503 has completed at 1.7043 on bearish divergence condition in daily MACD and RSI. This is supported with weekly MACD crossed below signal line too. Note that decisive break of 1.6111 support will solidify this case by completing a head and shoulder top reversal pattern (ls: 1.6742, h: 1.7043, rs: 1.6740) and will turn medium term outlook bearish. In such case, the whole fall down trend from 2.1161 could be resuming for a new low below 1.3503.

On the upside, above 1.6740 will invalidate the reversal view and argue that rise from 1.3503 is possibly still in progress for another high above 1.7043. Nevertheless, we'd continue to look for reversal signal as we expect the correction from 1.3503 to conclude inside resistance zone of 1.6428/7332 (38.2% and 50% retracement of 2.1161 to 1.3503).