Commodity prices dominated forex trading this past week, the price of crude oil in particular sending the currencies of export nations higher and weighing on others. With higher energy and food prices forcing up global inflation and traders reconsidering the possibilities of interest rate changes within various nations, many currency pairs consolidated within narrow ranges.

The minutes of the RBA’s May meeting, released Tuesday 20 May, showed concern over strengthening inflation, currently measured at 4.2%, and signalled a greater likelihood of additional interest rate increases rather than any potential rate cuts through the medium term. Although retail demand has weakened with vehicle sales declining 0.8% in April, housing remains in short supply and both retail and commercial construction are likely to remain strong. AUD/USD consolidated above the psychological 0.9500 level and spiked to 0.9652, the highest level since 1983, in light trading before closing the week at 0.9614.

U.S. economic data continue to surprise mildly to the upside, with first-time claims for unemployment compensation falling and continuing claims stabilising. Real GDP data for 1Q2008, to be released Thursday 29 May, is likely to be revised upwards, driven mainly by trade and nonresidential construction. The decline in housing prices was much smaller than expected, merely 0.2% in 1Q2008; however, the inventory of homes for sale jumped markedly, signalling the end is not yet in sight for the housing correction underway in parts of the country. The minutes from the FOMC’s May meeting, released Wednesday 21 May, signalled an end to easing monetary policy and potentially to a tightening one prior to the end of 2008.

The ECB has long maintained a neutral stance between spiraling inflation and downside risks to growth, and although German Ifo data surprised to the upside, economic data from France and other areas in the Eurozone have weakened in April and May. The Ifo members called for a rate cut; however, with inflation expected to reach 4% prior to the end of summer, the forex trading market has increasingly priced in a possible rate hike. EUR/USD rose 1.2% this past week on that possibility, closing at 1.5774.

Although consumer confidence in the U.K. declined in April, retail sales rose. Inflation remains at 3%, and the forex trading market began pricing in a 25bps rate hike by the BoE, strengthening the GBP against USD 1.3% and possibly reversing the downtrend begun in mid-March, while EUR/GBP consolidated within a 100-pip range below 0.8030.

The Canadian dollar strengthened from surging oil prices and speculation rising inflation could prevent any further easing of monetary policy, despite BoC warnings of possible future rate cuts and actual inflation figures remaining well below 2%. CAD gained against 10 of the 16 most actively traded currencies, including USD, with USD/CAD remaining below parity the entire week and AUD/CAD, rising since the beginning of 2008, showing a mild downtrend although remaining within its linear regression channel.

The New Zealand budget, released Thursday 22 May, included substantial personal income tax cuts and a stimulus package designed to aid household spending, pushing out anticipated RBNZ rate cuts from September 2008 potentially to spring 2009. NZD, although sliding in the main and losing almost 200 pips against AUD, rose 1.7% against USD, with the currency pair closing the week at 0.7856.