Although it was a difficult and volatile week for financial institutions, global stock markets, and commodities indices, the forex trading market remained relatively flat. Political turmoil in the Middle East again pushed crude oil to record highs, leading to further depreciation of the U.S. dollar and gains in commodities currencies.

The Westpac-Melbourne Institute consumer sentiment index fell by 6.7% in July and housing finance in May was down 7.9% for its fourth consecutive decline, indicating the RBA’s expected demand slowdown may be underway. June employment rebounded from May’s unexpected fall, however trend growth has also lowered and job ads for June fell 3.5%, adding to evidence the economic brakes may be biting. AUD/USD continued rangebound between 0.9450 and 0.9650, with a surge at week’s end to close at 0.9655 and momentum building to the upside, while AUD/NZD remains at historically high levels and AUD/CAD moved to the bottom half of its regression channel, entered at the turn of the year.

Although U.S. retail sales figures remain propped by the tax rebate scheme and exports narrowed the trade deficit dramatically, driven by lowered demand for imported energy products, rumours of insolvency beset government mortgage entities Fannie Mae and Freddie Mac and dragged USD broadly lower at week’s end. Of note, a U.S. regional bank, IndyMac, failed on Saturday and was taken over by the FDIC. The coming forex trading week will be influenced by Fed Chairman Bernanke’s semi-annual testimony before Congress on Wednesday and Thursday, and his comments on financial sector regulatory reform will have keen attention; however much negative sentiment is already priced into USD and downside risk may be limited.

May industrial production for Germany, Italy, and France all measured lower than expected, with the overall Eurozone figure to print on Monday. Although this will probably reflect a significant decline, CPI inflation at 4.0% in June will not allow the ECB to relax monetary policy any time soon. EUR/USD gained 1.5% in the week to close at 1.5923, at the high end of its defined range.

The BoE left rates unchanged at 5.0%, as widely expected, in a balance between a sharply slowing economy and inflation at “letter-writing” above-target levels. EUR/GBP is forming a potential pennant with pressure building to the upside, and ended the week sharply higher at 0.8014, while GBP/USD moved to the top of its trading range and closed at 1.9867.

The Bank of Canada meets Tuesday 15 July and is widely expected to keep rates steady at 3.0%, a decision already priced into the market. As inflation in Canada remains tame, future bias is also expected to remain neutral, and on this strength CAD/USD reversed its gains from the previous week to close at 1.0092.

New Zealand business confidence remained very low in 2Q2008, leading to expectations of further GDP contraction, and CPI, scheduled for release on Tuesday 15 July, is widely expected to climb at least 1.4% for the quarter. NZD/USD moved into the upper range of a price channel entered at February’s end, best seen on daily charts, and closed slightly up for the week at 0.7610.

Fundamental releases for Japan indicate an economy in neutral, however the yen continues to be dominated by the carry trade. USD/JPY lost 0.8% for the week while AUD/JPY remained flat, closing at 102.71.