Sterling Extends Rally, Dollar Rebounds Against Yen on a Data Driven Day

It’s clearly a data driven day. Dollar remains pressured at fresh 26 years low against Sterling in US session, but steadies against Euro. Even though headline PPI in US slowed more than expected to 3.3% yoy, dollar is supported by stronger than expected core PPI which accelerated to 1.8% vs exp of 1.6% where core PPI
stayed for 3 months. In addition, dollar is indeed driven higher against the Japanese after TIC capital flow rose to fresh record high of $126.1b, much higher than expectation of $70b.

Sterling was boosted higher earlier today on higher than expected consumer inflation data. In Jun, CPI moderated to from 2.5% yoy to 2.4%. However, that was higher than consensus of 2.3%. Meanwhile, RPI, retail price index, indeed accelerated from 4.3% yoy to 4.4% even though core RPI stayed at 3.3%. The data clearly indicates that there is no solid support by BoE to relax its tightening bias yet as inflation may not moderate as fast as BoE members would like to see. And, should inflation stabilizes above the 2% target, or even worse, re-accelerates, BoE will be forced to have another hike. The MPC meeting minutes will be released tomorrow and will then be closely watched on how nervous the members were and thus provide a more accurate assessment on the possibility of another near term hike.

On the other hand, Germany’s ZEW was a big disappointment today, nose-diving from 20.3 to 10.4, much worse than expectation of 21. The index peaked in May at 24.7 and has been deteriorating since then. The drop in business confidence highlighted the risk that current rise in the Euro, in particular against dollar and yen, are starting to weigh on export driven manufacturing economy and domestic demand to import. Euro is still steady against dollar but is under tremendous pressure against Sterling.


Daily Pivots: (S1) 2.0320; (P) 2.0361; (R1) 2.0400; More

Sterling powers through 2.04 level today and surges to as high as 2.0474 so far. Rally from 1.9621 is still in force and at this point, as long as 2.0348 support holds, further rise is expected to be seen towards next upside target of 100% projection of 1.9183 to 2.0132 from 1.9621 at 2.0570. However, as bearish divergence could continue to stay in 4 hours MACD and RSI, a break below 2.0348 support will argue that a short term top is possibly formed and bring pull back to 4 hours 55 EMA (now at 2.0262) first. But downside should be contained by 2.0056 support and bring another rise.

In the bigger picture, the sustained break of 2.0207 projection target confirms underlying upside momentum is still strong. Also, it added much credence to the case that whole up trend from 1.7047 is resumption of multi-year up trend from 1.3680. In such case, further rally should then be seen to 61.8% projection of 1.3680 (01 low) to 1.9554 (05 high) from 1.7047 (05 low) at 2.0677 first.

Having said that, even in case of a short term correction, downside should be contained above 1.9783 resistance turned support and bring medium term rally resumption. Also, break of 1.9862 low is needed to indicate a medium term top is formed and turn outlook neutral. Otherwise, medium term outlook will remain bullish.

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Shing-Ip Tsui is the founder and CEO of ActionForex is set up with the aim to empower individual forex traders by providing insightful contents. Analysis reports, live pivot points on majors and crosses, etc are provided with collection of carefully selected educational articles and free trading ebook downloads.