JPY Firm on Risk Aversion after Rating Jittery, GBP Tumbled on GDP Disappointment

Sterling fell sharply today after disappointment from Q4 GDP data. GDP managed to turn positive to 0.1% qoq but fell short of expectation of 0.4% qoq, suggesting that recovery is still fragile and there are much risks of returning into recession. Euro, on the other hand was supported against sterling after release of better than expected Ifo business climate which rose to 18 month high of 95.8 in January.

Japan yen had a roller coaster ride today. Yen strengthen in Asia on talks that PBoC will ask several domestic banks to raise their reserve ratio. Then, yen was shot down by news that S&P placed a negative outlook on Japan's AA sovereign long-term credit rating and warned down a downgrade if economic data remain weak and measures to boost medium-term growth are not forthcoming, given the country's high government debt burden and its weak demographic profile. Nevertheless, Yen regained strength after Finance Minster Kan assured markets of fiscal discipline.

BoJ left overnight lending rate unchanged at 0.1% as widely expected. Assessment of the economy is left unchanged and is picking up thanks to stimulus measures around the world. However, there central bank does not see sufficient momentum to support a self-sustaining recovery in domestic private demand, yet. Stamping out deflation is still a crucial challenge of the bank. Forecasts are broadly unchanged from that made in October and deflation will be more moderate than predict because of rise in crude oil prices. BoJ Governor Shirakawa said there is no change in the central bank's stance of keeping monetary policy very easy. Finance Minister Kan reiterated today that the BOJ has more options to combat deflation and it's believed that BoJ is considering to expand an emergency loan program or increase purchases of government bonds.

There are talks in the market that PBoC will ask several domestic banks to raise their reserve ratio. Industrial & Commercial Bank of China is believed to have ordered its branches to stop issuing new loans for the rest of January while China Citic Bank has suspended new lending in Shanghai. Bank of China has stopped extending new corporate loans in the Shanghai area. Also, Bank of China's earlier than expected announcement of its fund-raising plans is viewed as a confirmation to view of regulator's determination to slow loan growth.

GBP/JPY Mid-Day Outlook

Daily Pivots: (S1) 145.24; (P) 145.98; (R1) 147.33; More

GBP/JPY's break of 144.58 confirms that fall from 150.68 has resumed and the cross should now be targeting 141.99 support next. Break there will further affirm the case that consolidation from 139.69 has completed at 150.68 alrady and whole decline from 163.05 is resuming. In such case, deeper decline should be seen to retest 139.26 low next. On the upside, though, above 147.25 minor resistance will mix up the near term outlook and we'll turn neutral first in such case.

In the bigger picture, medium term rebound from 118.18, which is a correction to the long term down trend from 07 high of 251.90, has completed at 163.05 already. Fall from 163.05 is possibly resuming as consolidation pattern from 139.69 has likely finished at 150.68 already. Break of 139.26 will confirm this bearish case and target 61.8% retracement of 118.81 to 163.05 at 135.70 next. Break will further affirm the case that whole down trend from 2007 high of 251.90 is resuming for another low below 118.81. This will remain the preferred view as long as 150.68 resistance holds.

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