Dollar recovers strongly after earlier losses as risk aversion comes back in financial markets. European stock markets are generally down in spite of some positive economic data from UK. DOW also falls below 8700 level in early US session. Dollar index recovers back to above 79 and the greenback strengthens against most major currencies. Treasuries also jumps with 10 year bond year dropping back to below 3.6% level. As noted before, we're expecting strong support for the dollar index near to 77.69 key support level. While there is no confirmation of bottom before a break of 79.48 resistance, we'd expect further decreasing downside momentum even in case of another fall.

ISM non-manufacturing index improved slightly to 44 in May, below expectation of 45. Employment component rose slightly to 39 but new orders dropped back to 44.4 level. Challenger report showed planned layoff in US dropped by another -16.1% mom to 111k in May, lowest number since last Sept. Year-over-year rise dropped sharply from 47.3% to 7.4%. ADP employment showed -532k job loss in May, also better than revised -545k in April. Data from UK were upbeat with PMI services rising more than expected to 51.7 in May, back above 50 for the first time since April 2008. Nationwide consumer confidence improved for another month from 51 to 53 in May, beating expectation of 52. Australian economy unexpectedly expanded 0.4 qoq in Q1, beating expectation of -0.2% qoq contraction and avoided a technical recession. However, Eurozone Q1 GDP was revised down to -4.8% yoy, worst since record started. PPI dropped -1.0% mom, -4.6% yoy in April.

Technically, it's possible that DOW's rally this week represents the terminal thrust following triangle consolidation in May. Focus will be on 8374/8453 support zone. Break of which will be an important signal that DOW has topped out already and will bring some sizeable correction which should support the rebound in dollar in general.

GBP/USD Mid-Day Outlook

With 4 hours MACD dragged below signal line, an intraday top should be in place at 1.6610 and outlook is turned neutral for the moment. Nevertheless, note that another rise is mildly in favor as long as cable stays in side inner rising channel (support at 1.6235). Above 1.661 will target 50% retracement of 2.1161 to 1.3503 at 1.7332 next. However, note that break of the channel support will argue that a short term top is at least formed. Deeper decline should then be seen to 1.5778 cluster support and below.

In the bigger picture, GBP/USD's rally is admittedly much stronger than expected but there is no change in the view that rise from 1.3503 is corrective in nature. Though, it might be correcting the whole fall from 2.1161 rather than that from 2.0158. Having said that, current rise is expected to conclude inside resistance zone of 38.2% retracement of 2.1161 to 1.3503 at 1.6428 and 50% retracement at 1.7332 Hence, focus will remain on reversal signal as the rally continues. Break of the mentioned near term trend line support (now at 1.5127) will suggest that the rise from 1.3503 has finally completed and should turn outlook bearish for a retest of this low. However, sustained break of 50% retracement of 2.1161 to 1.3503 at 1.7332 will argue that the long term trend in GBP/USD is indeed already changed and we'll reassess the bullish potential in that case.

Economic Indicators Update

GMT Ccy Events Actual Consensus Previous Revised
23:01GBPBRC Shop Price Index May1.30%----
23:01GBPNationwide Consumer Confidence May53525051
01:30AUDGDP Q/Q Q10.40%-0.20%-0.50%
01:30AUDGDP Y/Y Q10.40%-0.40%0.30%
07:55EURGerman PMI Services May F45.24646
08:00EUREurozone PMI Services May F44.844.744.7
08:30GBPPMI Services May51.749.548.7
09:00EUREurozone GDP Q/Q Q1 P-2.50%-2.50%-2.50%-1.80%
09:00EUREurozone GDP Y/Y Q1 P-4.80%-4.60%-4.60%-1.70%
09:00EUREurozone PPI M/M Apr-1.00%-0.90%-0.70%
09:00EUREurozone PPI Y/Y Apr-4.60%-4.60%-3.10%-2.90%
11:30USDChallenger Job Cuts Y/Y May7.40%--47.00%
12:15USDADP Employment Change May-532K-530K-491K-545K
14:00USDISM Non-Manufacturing May44.00%4543.7
14:00USDFactory Orders M/M Apr0.70%0.50%-0.90%
14:00USDFed Bernanke Testifies Before House Budget Committee----
14:30USDCrude Oil Inventories-1.7M-5.4M