Market sentiments are generally boosted by solid PMI data and corporate earnings today. US ISM manufacturing dropped slightly to 55.5 in July but was better than consensus of 54.2. UK Manufacturing PMI dropped just mildly from 57.6 to 57.3 in July, above expectation of 57.1. The data suggests that UK manufacturing sector is still in solid expansion which supports momentum for growth in Q3 and H2. Eurozone PMI manufacturing was revised slightly up from 56.5 to 56.7. Swiss SVME PMI also beat expectation and rose to record high of 66.9, suggesting strong recovery onwards. Overall sentiments are additionally lifted by solid earnings from HSBC and BNP Paribas. DOW is up over 1.5% in early trading while FTSE 100 is up over 2%. Dollar is broadly pressured with EUR/USD breaks 1.31 level and GBP/USD breaks 1.58.

Dollar index drops further to as low as 81.17 so far today. Intraday bias remains on the downside and current decline from 88.70 is expected to continue towards 80.04, which is close to 80 psychological level as well as 61.8% retracement at 79.73 before conclusion. On the upside, above 81.98 will turn intraday bias neutral but short term outlook will remain bearish as long as 83.45 resistance holds.

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RBA rate decision will be the main focus in the upcoming Asian session. RBA will very likely leave the cash rate unchanged at 4.5% in August. Inflation in Australia undershot market expectations in 2Q10 with the headline CPI rose +0.6% q/q, compared with a +0.9% increase in the prior quarter. On annual basis, the reading rose +3.1% in 2Q10, up from +2.9% y/y in 1Q10. The results were much weaker than market expectations of a +1% q/q and +3.4% y/y rise. The RBA's weighted median and trimmed mean both recorded slightly slower increases of +0.5% q/q. Disappointment in inflation may slow the central bank's pace of tightening. While we retain our current view that RBA will pause in the third quarter before hiking interest rates again by +25 bps in the fourth quarter, a pause for the full second half in 2010 cannot be ruled out, depending on economic development both in Australia and overseas.

AUD/NZD's recent rebound suggests that pull back from 1.3229 has possibly completed at 1.2090, far ahead of 1.1925 cluster support (50% retracement of 1.0628 to 1.3229). RBNZ has stated that the tightening cycle will be slower than originally thought. Unless we get something very dovish from RBA tomorrow, we'd continue to seen Aussie slightly outperform Kiwi in near term as AUD/NZD rebounds towards 1.3229 resistance.

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GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.5583; (P) 1.5652; (R1) 1.5752; More.

GBP/USD's rally is still in progress and reaches as high as 1.5881 so far today. Intraday bias remains on the upside and current rise is expected to target 61.8% retracement of 1.7043 to 1.4230 at 1.5968 next. Break will then target 1.7043 resistance. On the downside, below 1.5722 minor support will turn intraday bias neutral and bring retreat. But downside should be contained above 1.5123 support and bring another rise.

In the bigger picture, current rise from 1.4230 is treated as the third leg of the whole medium term consolidation pattern that started at 2009 low of 1.3503. Further rally would now be seen towards 1.7043 resistance and possibly above as the consolidation continues. However, we'd expect strong resistance between 1.7043 and 50% retracement of 2.1161 to 1.3503 at 1.7332 and finally bring long term down trend resumption. On the downside, break of 1.5123 support will argue that rise from 1.4230 has possibly completed earlier than we thought and will turn focus back to this low.

GBP/USD

GBP/USD