Dollar continues to recover in early US session as financial markets are generally lacking clear direction. US stocks flip flip around green and red, paying little reaction to unexpected rebound in new residential construction data from US in Feb. Building permits rose 3.0% to 0.58m annualized rate while housing starts rose strongly by 22.2% to 0.58m annualized rate. PPI moderated to -1.3% yoy while core PPI slowed to 4.0% yoy in Feb. Dollar index is back above 87 level and reaches as high as 87.35 so far. But after all, focus remains on 87.76 resistance for the first indication that correction from 89.62 has completed. Otherwise, risk remains on the downside.

Euro drew little support from much stronger than expected ZEW today and retreats against dollar and swiss franc. In Germany, ZEW economic sentiment surprisingly rose for the 5th consecutive months to -3.5 in March, the highest reading since July 2007, from -5.8 a month ago. At the same time, Eurozone's sentiment also improved to -6.5 during the month from -8.7 in February. The improvement was probably driven by the ECB's rate cut to 1.5% on March 5. Investors anticipated it could help boosting economy.

Switzerland's industrial production plunged -5.9% yoy in January , the biggest drop since 1Q02, following a revised gain of +0.8% a month ago. The yearly decline also exceeded market expectation of -4.5% as economy deteriorated rapidly in Europe and demand for machinery in the US slumped. When compared with the previous quarter, industrial production rose +0.1%, better than consensus of -0.1% and -5.1% in 3Q08. UK's DCLG house prices contracted -11.5% in January (consensus: -11.87%), after a -10.2% decline in December.

The Japanese weakens mildly against the greenback but remains in tight range against Euro and Sterling. Markets focus will be on BoJ announcement in the coming session. BoJ said that it intends to provide as much as 1T yen of subordinated loans to banks and will provide details of this extremely extraordinary measure as soon as possible. BoJ Governor Shirakawa said that such plan doesn't mean the banks should not venture to raise private capital on their own. He said that there is no crisis in bank lending in Japan and there is no risk that any large bank will default. Japan's tertiary industry index rose +0.4% in January, better than consensus of -0.5% and -1.6% in December. Final reading for machine tools orders was revised down to -84.4% yoy in Feb.

According to the minutes of RBA's meeting in March, the policymakers that rooms for further rate cuts and the reason for pausing this month was to 'leave adequate flexibility for policy at future meetings'. Moreover, the RBA would like to evaluate the impact of the previous 400 bps cuts as well as the AUD 42B cash handouts to the public. However, economic data released after the meeting showed that Australia's economy continued to deteriorate. 4Q08 GDP surprisingly dropped by -0.5%, the first contraction in 8 years. Also, unemployment rate rose to 4-year high of 5.2% in February. Currently at 45-year low of 3.25%, RBA's policy rate is higher than most central banks such as the FED' 0-0.25%, BOE's 0.5% and even RBNZ's 3%. Going forward, we believe the central bank will ease further, probably by 25 bps in April and another 25 bps the meeting after.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3889; (P) 1.4060; (R1) 1.4232; More

GBP/USD's fall from 1.4230 extends further today and dips below 1.4 level in early US session. As discussed before, rebound from 1.3654 has possibly completed after being limited by near term falling channel resistance. Below 1.3912 minor support will affirm this case and flip intraday bias back to the downside for 1.3654 first and break will bring retest of 1.3503 low. On the upside, however, break of 1.4304 will suggest that fall from 1.4984 has completed and will turn short term outlook bullish in such case.

In the bigger picture, a medium term bottom is in place at 1.3503 after GBP/USD completed the five wave sequence from 2.0158 (1.7445, 1.8668, 1.4557, 1.5722, 1.3503). It's uncertain whether subsequent consolidation/correction from 1.3503 has completed. On the upside, break of 1.4304 will indicate that fall from 1.4984 has completed and will also argue that consolidation from 1.3503 is still in progress for another rise to 1.4984 and above before completion. On the downside, however, decisive break of 1.3503 will confirm that long term down trend from 2.1161 has resumed.