Sterling rebounds strongly after political uncertainty in UK was cleared, at least temporarily. Prime Minister Gordon Brown won the support of most Labour lawmakers, promising to address his weakness by changing his leadership style after a two-hour closed dollar meeting in Parliament following the worst defeat national election results since 1918. Political uncertainty is believed to be temporarily cleared as Labour rebels believe there is no alternative leader coming forward. And even worse is that a new leader would have a stage an early election and at which Labour Party would be crushed. The pound is also supported by better than expected housing data which saw RICS house price balance improved to -44.1%, best reading in 18 months.

Elsewhere, dollar continue to consolidate recent gains against most currencies. Stronger rebound is seen in Canadian dollar as crude oil climbs back to above 69 level. Euro on the other hand is weighed down by comments from IMF. In its twice-yearly assess of the Eurozone economy, IMF said urged policy makers in EUrozone to take further decisive action, especially in the financial sector to secure recovery and return to self-sustaining growth. The Report also said that ECB should explore any margin for lowering raters further to under 1% as soon as possible.

Technically, an intraday top is in place in dollar index at 81.47 and some more consolidation should be seen, with risk of pull back to 4 hours 55 EMA (now at 80.11). But downside is expected to be contained above 79.03 support and bring rally resumption. Focus remains on next key resistance at 82.63 (38.2% retracement of 89.62 to 78.33 at 82.64) and break there will firstly confirm that whole decline from 89.62 has completed at 78.33. More importantly, the three wave structure in turn indicates that such fall is merely a correction, or part of consolidation pattern in the larger up trend. In such case, we'd expect a test of 86.84/89/62 resistance zone. While another fall cannot be ruled out for the moment, we'd expect limited downside potential and 77.69/92 key support zone should remain intact.

GBP/JPY Daily Outlook

GBP/JPY's break of 158.56 minor resistance suggests that pullback from 160.44 has possibly completed at 154.85 already. Intraday bias is flipped back to the upside. Further break of 160.44 high will confirm recent rise has resumed and should target 55 weeks EMA at 162.21 next. On the downside, below 156.61 minor support will indicate that fall from 160.44 is still in progress and argue that a short term top is in place already. Deeper decline could then be seen to 150.86 resistance turned support.

In the bigger picture, there is no sign of topping in GBP/JPY yet and the rise from 118.81 might extend further. But after all, there is no change in the view that such rise is merely a correction in the larger down trend and hence we'll continue to look for reversal signal as GBP/JPY is now staying in 155.88/167.34 resistance zone (38.2% and 50% retracement of 215.87 to 118.81). On the downside, break of the trend line support (now at 147.90) will be an indication that whole rise form 118.81 has completed and focus will then turn to 143.00 support for confirmation.

Economic Indicators Update

GMT Ccy Events Actual Consensus Previous Revised
23:01GBPBRC May Retail Sales Monitor-0.80%4.60%
23:01GBPRICS House Price Balance May-44.10%-52.00%-59.90%-58.70%
1:30AUDNAB Business Confidence May-2---14
5:00JPYLeading Indicators Apr P76.50%77.276.375.50%
6:00JPYMachine Tool Orders Y/Y May P-79.30%---80.40%
6:00EURGerman Trade Balance (EUR) Apr9.0B9.4B8.9B
8:30GBPDCLG UK House Prices Y/Y Apr-13.30%-13.60%
10:00EURGerman Industrial Production M/M Apr0.30%0.00%
14:00USDWholesale Inventories Apr-1.10%-1.60%
14:00USDIBD/TIPP Economic Optimism Jun5148.6