Australian FOREX Weekly Outlook 17/10/2005

Dollar’s main supporting factor at the moment i.e. the yield factor is looking a bit less attractive coming into this week. While no change is seen in the Fed’s stance to keep raising rates, other regions, which looked like staying on hold are likely to give in to the rising inflationary pressures brought about by rising oil prices, and raise rates sooner than expected. More hawkish talk from ECB officials and a rate increase within their next two meetings may well be the spark the Euro is looking for, to break higher. In spite of signs of slow growth, the U.K. against popular business sentiment is expected to keep rates on hold while Japan is looking to finally increase rates early next year. Among the Commodity Bloc, New Zealand is expected to raise rates in next week while Canada is expected to follow suit in their next meeting but Australia is expected to stay on hold well into the next year and keep rates at its current high level.

Question marks are now being raised on the ability of the average American consumer to deal with these record high oil prices as well high interest rates. Of course the Hurricanes have compounded the problems but at least a level has been seen where demand for oil declines. Its brief foray above the $70 pb mark saw first signs of waning demand and prices have accordingly eased back towards $60 pb. However the joy could prove short lived as the Northern Hemisphere winter approaches and demand for winter fuel oil rises, this unavoidable high costs will cut into the spending habits of the average consumer and make a further dent in confidence with Friday’s survey showing that consumer confidence already went towards its lowest level in 13 years.

On a positive note, the rising U.S. interest rates is increasing the appetite of foreign investors for U.S. assets and after last month’s impressive rise in foreign net capital inflow, this month’s figure is also expected to be around healthy levels. Thus as long as the Trade deficit can manage to stay below $60 Bn and capital inflow remains above that mark, at least the structural imbalance in the U.S. economy will remain away from the market’s current chain of thought. Another factor to be watched is the regional manufacturing data surveys which are expected to get back on track post hurricanes however the high costs of raw material could hamper activity substantially.

After months of sub standard data, the pick up seen in Italy is a very heartening factor for the Euro and could well prove decisive. A weaker Euro has finally led to a boost in exports and the subsequent pick up in business sentiment with this week’s Consumer confidence index is also expected to rise. The sooner this increase in confidence is translated to improved consumer spending throughout the Euro-Zone, the more confidence the ECB will get to raise rates.

EUR/USD – The pair has closed in mixed interest region of 1.21 with immediate resistance lying at 1.2210 and decent selling orders above it. A stronger break above it brings into focus very strong resistance region at 1.2285-1.2305, this area is expected to hold well but the Dollar risks a fresh downtrend if this region is decisively broken above and losses could quickly extend to 1.24 where resistance is stronger should cap any Dollar losses. On the downside, bottom picking bid interest comes up below 1.20 with good support around 1.1975. A clear and decisive break below this mark will shift the momentum back in the Dollar’s favour and losses could accelerate to 1.19 with decent bid interest around it followed by very strong support mark of 1.1850 which is expected to cap any Dollar gains.

USD/JPY – Yen has made an impressive recovery after touching multi month lows last week, which could point towards the 115 region as being a possible top for this pair. Immediate resistance lies in the 114.60-75 region with mild selling orders lying above it. The Selling orders get stronger within the 115 region with very strong resistance around 115.40. Mixed technical interest seen within the 113.40-114.60 region with immediate support cropping up around 113.20 followed by decent bid interest just below 113. A clear break below could accelerate the Yen’s gains with 112.50 as strong support mark which is followed by very strong support around 111.90 which is expected to hold well and cap any losses.

GBP/USD – The pair experienced exaggerated losses which were followed by a strong rally. Its weak fundamentals mean that cue is taken largely from Dollar’s general direction thus volatile moves are likely. Immediate resistance lies in the 1.7790-1.7810 region, this area is crucial has it has held firm in the past and will not be broken easily as strong selling orders lie just above it. A clear break above could accelerate gains before the 1.79 region is expected to provide strong resistance and any gains are expected to be capped within it. On the downside, immediate support has now moved up to 1.7620 but it is a weak level and break below could accelerate losses towards 1.7540-55 region which holds strong support with decent bid interest lying just below 1.75.