Sterling tumbles sharply in an otherwise quite market on talk that UK would slump into a Japan-style lost decade. There are speculation that BoE will use the Quarterly Inflation Report to be released this Wednesday to signal the risk of falling into a trap debt deflation and that was the main reason that the bank extended its asset purchase program last week. Former MPC member Wadhwani also said that US is tracking the path trodden by Japan in the 90s. He said that the bounces in three to four quarters of decent bounce would be seen by the bounces are driven by temporary factors only. He expects second half of 2010 would be even more difficult in UK.

Elsewhere, dollar remains generally steady against most major currencies as consolidation continues. The Japanese yen recovers mildly in general but key short term support levels are still holding. Note that as mentioned before, commodity currencies remain relatively firmer in general. However, some additional pressure might be seen in near term, considering that Gold's dive below 950 level is suggesting a short term top is in place there.

Data released earlier today saw Eurozone Sentix Investor Confidence improved more than expected to -17 in Aug. Japanese current account rose more than expected to 1.8T JPY in June. Machine orders rose more than expected by 2.7% mom in June. Economic watcher sentiment rose slightly to 42.4 in July but fell short of expectation of 43.4.

GBP/USD Mid-Day Outlook

 GBP/USD's fall from 1.7043 extends to as low as 1.6581 so far today and at this point, intraday bias remains on the downside for further decline. As discussed before, with 4 hours MACD staying negative, a short term top should be in place at 1.7043 already. Break of 1.6338/6582 support zone will confirm this case and target 1.5983 support next. On the upside, above 1.6717 minor resistance will turn intraday outlook neutral and bring recovery. But another fall is still in favor as long as 1.7043 resistance holds.

In the bigger picture, the sharp reversal from 1.7043 argues that whole rise from 1.3654 has possibly completed with five waves up already, on bearish divergence condition in daily RSI. Break of 1.6338/6582 support zone will solidify this case and turn focus to 1.5983 support for confirmation. Also, note that, whole rise from 1.3503 is treated as correction to down trend from 2.1161 only is expected to conclude inside resistance zone of 1.6428/7332 (38.2% and 50% retracement of 2.1161 to 1.3503). Completion of rise from 1.3654 will also indicate that such correction from 1.3503 has completed too. In such case, deep decline should be seen to send GBP/USD through 1.3503 low eventually. On the upside, in case of another rise, we'd continue to monitor for reversal signal as GBP/USD approaches 1.7332 fibo resistance.

GBP/USD

Economic Indicators Update

GMT Ccy Events Actual Consensus Previous Revised
23:50JPYCurrent Account (JPY) Jun1.80T1.42T1.02T 
23:50JPYMachine Orders M/M Jun2.70%2.60%-3.00% 
6:00JPYEconomy Watchers Sentiment Jul42.443.442.2 
8:30EUREurozone Sentix Investor Confidence Aug-17.0-26.0-31.3