Australian FOREX Weekly Outlook 24/05/2006

24/05/06

last week’s recap

The Dollar posted sharp gains against the major currencies last week. The dollar strengthened from the middle of the week on stronger than expected CPI data as the likelihood of further rate hikes by the Fed increased. The Euro rallied early in the week but retraced after failing to break above the psychological 1.3000 level. On the data front, the key release of the German ZEW disappointed coming in below expectations. The Japanese yen also weakened against the dollar after earlier gains at the start of the week. On the data front, the Q1 GDP figures showed a growth of 0.5% beating expectations. The Sterling failed to break the 1.9000 level early in the week and retraced 250 points. On the data front, UK Retail sales numbers impressed with sales rising 0.6% over the month (versus consensus of +0.5%). The Aussie traded lower versus the dollar as commodity prices continued to fall over the course of the week.

The A$ closed last week at 0.7623 having started the week at 0.7761. The Euro closed last week at 1.2760 having started the week at 1.2927. US$/JPY closed last week at 111.74 having started the week at 110.01.The GBP closed last week at 1.8765 having started the week at 1.8946. The A$ closed last week at 0.7623 having started the week at 0.7761.

The week ahead

Markets are increasingly alert to US economic data as the Fed continues to weigh the risk of rising inflation against the possibility of a moderation in growth, especially after the upward surprise in the April core CPI reading. Japan and German inflation reports will also be closely watched for there implications for monetary policy.

In the States as mentioned US core inflation surprised to the upside in April and this suggests the core PCE index (Friday) will be watched closely as it is the Fed’s favored indicator for inflation. This will also mean the revised May Consumer Sentiment survey (Friday) will also be keenly watched. Personal income (Friday) is likely to post a strong gain for April and personal spending also on Friday is expected to have risen as well. The US housing market is a key factor in the H2 slowdown story and this will see the market closely watch new home sales (Wednesday) and existing home sales (Thursday). The other key data release will be US GDP (Thursday). We will provide our previews of these data releases in the daily summary.

In the Eurozone this week sees the release of key survey data. German IFO survey (Wednesday) has surprised strongly on the upside in the past several months. Italian business confidence (Thursday) is expected to correct lower. In the UK the Q1 GDP data (Thursday) is expected to be unchanged on the advance reading. The CBI industrial trends survey (Wednesday) has been picking up since August and it will be interesting to see if this improvement in the manufacturing sector continues. We will provide our previews and reviews of these data releases in the daily summary.

In Japan as the withdrawal of excess liquidity from the Japanese money market now nearing completion, some analysts are expecting a rate hike by the BoJ as soon as June. This makes the April inflation report (Friday) they key data release for this week in Japan.

Key Weekly Pivot levels

• Euro 1.2790

Initial support at 1.2685 (May 11 low) followed by 1.266 (May 9 low). Initial resistance is now located at 1.292 (May 17 corrective high) followed by 1.2973 (May 15 reaction high).

• Yen 112.15

Initial support is located at 110.50 (61.8% retracement of the 108.93 to 113.03 advance) followed by 109.9 (76.4% retracement of the 108.93 to 113.03 advance). Initial resistance is now at 112.96 (38.2% retracement of the 119.41 to 108.98 decline) followed by 114.18 (May 4 high / 50% ret 119.41 to 108.98).

• Pound – 1.8790

Initial support at 1.8633 (May 22 corrective low) followed by 1.8603 (23.6% retracement of the 1.7230 to 1.9027 advance). Initial resistance is now at 1.8887 (May 23 high) followed by 1.8964 (May 19 corrective high).

• Aussie – 0.7505

Initial support at 0.7466 (May 22 low) followed by 0.7405 (50% retracement of the 0.7015). Initial resistance is now at 0.758 (May 22 high) followed by 0.7676 (May 18 high).