Sterling continues to be the weakest major currencies and drops broadly today on concern on the increasing debt level of the country as well as on report of a rift between UK Chancellor Darling and PM Brown over the UK deficit of GPB 178b. An article by FT said that Darling's position is that revenue from growth should be used to cut borrowings rather than increase spending. This was in contrast to Brown's comment that such extra revenues should be used to boost spending to reduce pain of looming cuts. Sterling is pressured across the board and the weakness is particularly apparent against commodity currencies, which are lifted by strength in gold and oil prices as well as stock market rallies.

GBPAUD is the weakest major cross this week and dropped over -2.8% so far. The cross is set to extend recent fall to 1.7326 support first and break there will confirm that the long term down trend that started at 2008 high of 2.7092 has resumed. In such case, GBP/AUD should target 61.8% projection of 2.0979 to 1.7326 from 1.8302 at 1.6044 next.

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Elsewhere, Japanese yen is broadly firmer with support from repatriation flows. Dollar is trying to recover in early US session as commodities are losing some momentum. Crude oil edged higher to 81.99 earlier today but lacks follow through buying to send it through 82.0 resistance yet. On the other hand, gold also edged higher to 1129.6 earlier today bug some profit taking is seen there and pushes the precious metal back to 1120 level. Nevertheless, the correction in dollar index is still in favor to continue and another fall could be seen to 38.2% retracement of 74.19 to 78.45 at 76.82. But we continue to expected downside to be contained there and bring resumption of rise form 74.19.

On the data front, Eurozone CPI rose to 10 months high of 0.9% yoy in November, inline with consensus. Germany unemployment unexpectedly dropped by -3k in December but unemployment rate climbed to 8.1%. UK PMI construction improved slightly to 47.1 in December Canada IPPI and RMPI rose more than expected by 1.0% mom and 2.2% mom in November respectively.

GBP/USD Mid-Day Outlook

Daily Pivots: (S1) 1.6014; (P) 1.6127; (R1) 1.6197; More

GBP/USD's fall from 1.6237 continues today and the break of 1.6046 minor support suggests that recovery from 1.5829 has completed after hitting 38.2% retracement of 1.6875 to 1.5829 at 1.6229. Intraday bias is flipped back to the downside for retesting 1.5829 low first. Nevertheless, note that firm break there is needed to confirm fall resumption, otherwise, we'd expect some more sideway trading first. Break of 1.5829 will target key cluster support of 1.5706 next.

In the bigger picture, we're still favoring the bearish case that medium term rebound from 1.3503, which is 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 sustain break of 61.8% retracement of 1.6875 to 1.5829 at 1.6475 will in turn indicate that whole fall from 1.6875 has completed and recent price actions from 1.7043 are merely consolidations to the larger rise from 1.3503 only. 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.

GBP/USD