Sterling Lifted by BoE Sentance, Dollar Steady, FOMC Next

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While dollar continue to consolidate in range ahead of FOMC rate decision and statement today, Sterling was boosted by hawkish comments from BoE official. BoE Sentance warned that it's hard to keep inflation on target if import and services price continue to go up and argued that the MPC must be ready to adapt its policies to the changing economic situation over the course of the recovery. He said that he has seen, in the last six to nine months, more positive trend emerging in both the UK economy as a whole and more specifically in the housing market.He is also confidence that there will be no double dip recession as long as the international economy continues to grow healthily. The comments affirm market's view that BoE will pause the asset purchase program next week and will probably start discussion on timing for withdrawal of the stimulus.

Earlier today, Yen strengthened broadly in Asia today as China's Securities Times reported that regulators have ordered banks to call back some of the loans they extended in January. Investors continue to be concerned with more tightening measures from China to cool inflation. Australian dollar was supported by stronger than expected CPI reading in Q4. CPI rose 0.5% qoq, 2.1% yoy, above expectation of 0.4% qoq, 2.0% yoy. Japan trade surplus was unchanged at 0.52T JPY. New home sales released from US unexpectedly dropped to 342k annualized rate in December.

FOMC will take center stage in US afternoon. Fed is expected to keep the policy rate unchanged at 0-0.25% at the January meeting. While there have signs showing improvement in economic outlook, job markets remained the area the Fed concerned the most and Fed will wait until unemployment rate has dropped substantially before considering rate hikes. In December, the Fed said there were plans to discuss alternative approaches to implementing monetary policy in the longer-run. While these comments were rather bearish, we believe policymakers' purpose was to suppress market speculations on premature exit. More in FOMC Preview: Current Conditions Warrant Low Interest Rates.

RBNZ will announce rate decision in the coming Asian session. Markets generally expect RBNZ to keep rates unchanged at record low 2.5%. Considering lower than expected inflation data in Q4, which showed -0.2% qoq drop, Governor Bollard will likely reiterate that rates will remain low until mid-year. NZD/JPY was hit hard this month on risk aversion edged further lower to 62.73 today. While it's still early to conclude whether medium term rise from 44.19 has completed, near term weakness is anticipated and we'd expect to see NZD/JPY to drop further to retest 59.85 cluster support (38.2% retracement of 44.19 to 69.70 at 59.95). A break above 64.93 resistance is needed to be the sign of stabilization. Otherwise, short term outlook in NZD/JPY will remain bearish.

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GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.6066; (P) 1.6167; (R1) 1.6241; More

GBP/USD's strong rebound today suggests that consolidation from 1.6077 is still in progress and turns intraday bias neutral. Nevertheless, we'd continue to expect another fall as long as 1.6284 resistance holds. As discussed before, corrective rise from 1.5829 should have completed with three waves up to 1.6456 already and whole decline from 1.6875 should be resuming. Break of 1.5829 will confirm this bearish case and target 1.5706 key cluster support. On the upside, though, above 1.6284 minor resistance will delay the bearish view and turn focus back 1.6456 resistance

In the bigger picture, we're still favoring the bearish case that medium term rebound from 1.3503, which is treated as a correction to down trend from 2.1161, has completed at 1.7043. Firm break of 1.5706 cluster support (38.2% retracement of 1.3503 to 1.7043 at 1.5691) will confirm this case and indicate that whole down trend from 2.1161 is likely resuming for a new low below 1.3503. However, note that break of 1.6456 resistance will in turn shift favor to the case that recent price actions from 1.7043 are merely developing into consolidations to the larger rise from 1.3503. That is, whole medium term rise from 1.3503 might not be finished yet and another rise could still be seen to 1.7332/8236 (50% and 61.8% retracement of 2.1161 to 1.3503) before completion.

img class=hand onload=resizeImg(this,450) src=http://www.actionforex.com/images/stories/contributors/actionforex/gbpusd20100127b.gif border=0 alt=GBP/USD 4 Hours Chart />

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