Sterling was the biggest winner last week on the back of drastic turn in speculations on expansion of quantitative easing campaign from Bank of England. Dollar, on the other hand, dived to new 14 month low after risk appetite as DOW closed above 10000 level for two consecutive days before ending the week at 9995.9. The Japanese yen was even weaker as yen crosses were pushed higher by rise in treasury yields. Aussie and Kiwi were firm on solid data from New Zealand. Euro's rally lost steam as the common currency was pressured by sharp selling in EUR/GBP cross.
The FOMC minutes for September's meeting suggested that the Fed, while acknowledged that the economic outlook has improved, remained cautious about the downside risk. Moreover, policymakers stressed that uncertainty about growth and subdued inflationary pressure made the central bank decided to keep interest rate low at an extended period of time. More in FOMC Minutes: Policymakers Remained Cautious Although More Optimistic Than Before
US advance retail sales showed less than expected contraction by -1.5% in September while ex-auto sales rose more than expected by 0.5%. CPI rose 0.2% mom, dropped -1.3% yoy in September with core CPI rose 0.2% mom, 1.5%. Empire state manufacturing index beat expectation by rising strongly to 34.57 in October but Philly Fed survey missed expectation and dropped to 11.5. INdustrial production rose 0.7% in September with capacity utilization rose to 70.5%. U of Michigan consumer sentiment disappointed and dropped to 69.4 in October.
German ZEW economic sentiment disappointed by dropping to 56 in October while German ZEW dropped to 56.9. Eurozone CPI was flat mom, dropped -0.3% yoy in September.
UK headline CPI slowed much more than expected from 1.6% yoy to 1.1%, a seven year low. Core CPI also dropped slightly from 1.8% yoy to 1.7%. Unemployment rate was unchanged at 7.8% in August versus expectation of a rise to 8.0%. Nevertheless, Sterling rebounded strongly on speculation that BoE may pause the quantitative easing program. BoE Markets Director Paul Fisher said that he's more confidence now that the GBP 175b asset purchase program was having the scale and speed of impact that we would have hoped for when we started in March. He hinted MPC might opt to pause the program to give themselves the option of doing more later rather than stopping the program. This echoed the comments from Deputy Governor Charles Bean that BoE will need gradually to remove the large monetary stimulus that we have imparted to the economy, otherwise we will be in danger of overshooting our 2 percent inflation target.
BoJ left rates unchanged at 0.1% as widely expected.
Canadian CPI was flow mom in September, dropped -0.9% while core CPI rose more than expected by 0.3% mom, 1.5% yoy in September
New Zealand Q3 GDP rose an impressive 1.3% qoq, 1.7% yoy, much stronger than expectation of 0.8% qoq, 1.1% yoy. Retail sales rose much more than expected by 1.1% mom in August, with ex-auto sales rose 1.2% mom.
Technically, while dollar index managed to recover mildly after dropping to as 75.21, there is no sign of bottoming yet. We're holding on to the view that dollar index is in the fifth wave of the five wave fall from 89.62, it now looks like it will dive further into 71.31/74.31 support zone before conclusion. In any case, a break above 77.43 resistance is needed to be the first sign of bottoming. Otherwise, near term outlook will remain bearish.
The Week ahead
A few things to note going ahead. Firstly, while Sterling's rebound was impressively strong last week, it's vulnerable to another sharp fall considering the event risks of BoE minutes, retail sales and more importantly, Q3 GDP report to be released this week. Sterling's strong was based on speculations that BoE might pause the QE campaign after completing the GBP 175b asset purchases. However, disappointing GDP report and dovish MPC minutes will flip the sentiments 180 degrees and send trigger some selloff in the pound.
Secondly, note that dollar's managed to find some footing towards the end of the week even though stocks confined to make new high while crude oil broke through 75 level to as high as 78.75. The greenback was just mildly down against Euro, Swissy and Canadian and even managed to close higher against Japanese yen. While there is no sign of bottoming yet, the greenback is quite oversold in near term and make be staging for a bounce. A number of Fed officials are scheduled to speak this week and will provide the guidance on whether Fed is preparing for exit and that will likely trigger some volatility in the greenback.
Thirdly, Canadian dollar lost some momentum even though crude oil maintained its strength. CPI report released last week was a bit disappointing but markets are still leaning towards that case that BoC will revere policy accommodations earlier than expected. This week's BoC rate be important in a way that focus will be on whether BoC will change its conditional commitment to hold rates at record low till Q2 of 2010.
Here is a summary of the key events this week
- Monday: BoJ Minutes; Bernanke speaks, NAHB housing market index
- Tuesday: RBA minutes; German PPI; US PPI, new residential construction, Fed Warsh speaks; BoC rate decision
- Wednesday: BoE minutes; Fed Lacker, Tarullo speaks, Beige Book
- Thursday: Japan trade balance; UK retail sales; Canada retail sales, BoC monetary policy report; Fed Lockhart, Dudley, Evans speak
- Friday: Eurozone PMIs, German Ifo; UK Q3 GDP; Fed Bernanke, Kohn speak, Existing home sales
GBP/USD Weekly Outlook
GBP/USD rebounded strongly after dipping to 1.5706 and reached as high as 1.6398. Initial bias remains mildly on the upside this week and further rise could be seen to falling trend line resistance at 1.6485. Nevertheless, upside should be limited there and bring pull back. On the downside, below 1.6212 will turn intraday outlook neutral first. Further break of 1.5919 support will flip intraday bias back to the downside for retesting 1.5706 low. However, note that sustained trading above the trend line will be the first sign that whole fall from 1.7043 has completed and will turn focus to 1.6740 resistance instead.
In the bigger picture, with 1.6740 resistance intact, there is no change in the bearish outlook. GBP/USD should have made a medium term top after completing a head and shoulder top reversal pattern (ls: 1.6742, h: 1.7043, rs: 1.6740). Whole rise form 1.3503, which is treated as correction in the long term decline form 2.1161 has completed too. Fall from 1.7043 is tentatively treated as resumption of the long term down trend, which should target a new low below 1.3503 eventually.
On the upside, however, break of 1.6740 resistance will indicate that fall from 1.7043 has completed already. The three wave structure will in turn suggest that it's merely a correction to the medium term rise from 1.3503. In other words, another high above 1.7043 should be seen before GBP/USD tops.
In the longer term picture, the corrective nature of the multi-decade advance from 1.0463 (85 low) to 2.1161 as well as the impulsive nature of the fall from there suggests that GBP/USD is now in an early stage of a long term down trend. Rebound from 1.3503, which is treated as correction in the larger down trend, has likely completed and fall from 1.7043 is tentatively treated and resumption of such down trend that will send GBP/USD through 1.3503 low eventually.