Sterling is hammered across the board on intensifying concern that PM Brown will be forced to step down after two years in job. The fifth minister has resigned within a week. Pensions Secretary Purnell resigned from Cabinet after polls closed in local and European Parliament elections and called for Brown to go to give the Labor Party a fighting chance of winning. While the market is steady elsewhere, GBP/USD dropped further to as low as 1.6017 and is set to take on 1.6 psychological level again. On the other hand, EUR/GBP rose sharply to as high as 0.8865 in early European session and took out near term level which suggests that cross has already bottomed out at 0.8574 earlier this week.

In addition to the development around Gordon Brown, markets' focus will be on job report from US today. Markets expect the US economy to lose another -530 jobs in May while unemployment rate is expected to jump further to 9.2%. If that's the case, it will be the seventh consecutive month in which net NFP fell in excess of 500k and the cumulative employment market contraction will exceed 6M market since recession began in December 2007.

Two important things to note about the leading indicators. Firstly, note that the employment component of ISM manufacturing index was down slightly from 34.4 to 34.3 in May. However, that of ISM services improved from 37 to 39, hitting the highest point since last Sep. Based on the recent improvements in these two components, some improvements should be seen in the Non-farm payroll which might take the numbers above -500k to -400k region. Secondly, there was also drastic improvement in consumer confidence which soared from 40.8 to 54.9 in May and was way above Feb's low of 25.3. The rebound in consumer confidence argues that unemployment rate may not be as bad as thought.

But after all, reactions in the markets may be muted unless we really see the figure comes in above -500k or with unemployment rate rose less to below 9.2%. In that case, dollar will probably be sent lower again by rising stocks.

Elsewhere, Swiss CPI rose 0.2% mom, dropped -1.0% in May. UK PPI input is expected to rise 0.7% mom, drop -8.3% yoy in May. PPI output is expected to rise 0.4% mom, drop -0.4% yoy. Canadian job report is expected to show -45k contraction in May with unemployment rate risen from 8.0% to 8.3%.

Technically, dollar index's rebound was limited by 4 hours 55 EMA and turned sideway. While a short term bottom is in place at 78.33, there is still no confirmation of reversal yet. Our view remains unchanged thought. we expect fall from 89.62 to conclude near to 77.69 level, with 61.8% retracement of 70.70 to 89.62 at 77.92. Hence, even in case of another fall, downside potential should be limited and dollar index should continue to lose momentum. On the other hand a break above 81.13 resistance will add much credence to the case the dollar index has indeed bottomed out. Further break of 82.63 cluster resistance (38.2% retracement of 89.62 to 78.33 at 82.64) will confirm that such fall has completed and the three wave structure will in turn affirm the view that price actions from 88.46 are developing into triangle consolidation, with fall from 89.62 as the third leg.

GBP/USD Daily Outlook

GBP/USD's fall from 1.6661 extends further to as low as 1.6017 so far today and at this point, intraday bias remains on the downside 1.5778 cluster support (38.2% retracement of 1.4395 to 1.6661 at 1.5795) first. Break there will confirm that a short term top is at least formed at 1.6661 and bring deeper fall towards outer channel support (now at 1.5174). On the upside, though, above 1.6432 minor resistance will suggest that fall from 1.6661 has completed and is merely a pull back only. In such case, recent rally might still extend further to 50% retracement of 2.1161 to 1.3503 at 1.7332 before completion.

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
07:15CHFCPI M/M May0.2%0.20%0.90%
07:15CHFCPI Y/Y May-1.0%-0.90%-0.30%
08:30GBPPPI Input M/M May0.70%-1.00%
08:30GBPPPI Input Y/Y May-8.30%-5.00%
08:30GBPPPI Output M/M May0.40%0.60%
08:30GBPPPI Output Y/Y May-0.40%1.20%
08:30GBPPPI Output Core Y/Y May1.20%2.40%
11:00CADNet Change in Employment May-45.0K35.9K
11:00CADUnemployment Rate May8.30%8.00%
12:30USDChange in Non-Farm Payrolls May-530K-539K
12:30USDUnemployment Rate May9.20%8.90%
12:30USDAverage Hourly Earnings M/M May0.20%0.10%