European Morning Update 9th May 2008

Friday, May 09, 2008; Posted: 01:22 AM

News from Australia:

The RBA has admitted that reducing inflation over the near term is highly unlikely and is relying on the current slowdown in domestic demand to bring the rate back into the CB’s 2%-3% comfort zone within two years. Until then it sees inflation levels at 4.5% for this year and 3.25% next.

On growth it sees GDP slowing to record a gain of 2.25% this year but then stabilizing with a forecast of 2.5% for next year and 2.75% in 2010. He cited slowdown in the global economy, continued financial market strains and tight domestic financial conditions as contributing to the dampening of domestic demand.

Releases from Japan:
                                                            Forecast    Actual
Japan March Leading Economic Index (P)   20.0%      20.0%
Japan March Coincident Index (P)             33.3%      33.3%

The following economic releases are due today:

March
French Industrial Production         (MoM)    - 0.4%
French Industrial Production          (YoY)    +1.6%
French Manufacturing Production   (MoM)    - 0.5%
French Manufacturing Production    (YoY)    +1.8%
U.S. Trade Balance                        USD   -61.4bn

As expected we saw the Dollar retrace some of the gains seen in the Asian morning. I remain with the view that we are close to an intermediate Dollar high and that before long we should see a correction lower begin to develop. Perhaps we should also consider the chance that yesterday’s peaks completed the entire recovery. Well, I can’t rule it out 100% but I can’t see many convincing signs from momentum to really suggest the top was seen yesterday.

In addition there are still a couple of targets that I still feel are begging to be tested – the 1.9335 area in Cable and 106.82 in Dollar-Yen. It may be that I am just being stubborn but given the overall unconvincing momentum signals and these targets I’ll stick with a bullish view for now – until otherwise proven wrong.

The trouble I have with today is that the release calendar has all the signs of providing more opportunity to take 40 winks rather than get involved too much so there is a chance that needs to be considered of some tight range trading today.

If there is an argument for the Dollar to push directly higher it is because the Euro has made the largest percentage decline in 2 ½ years and having broken key support levels there may still be a little more Dollar short position squaring ahead of the weekend.

First thing does suggest potential for a modest extension to the downward correction but following this the risk is either for a reversal into range or back to new Dollar highs.

Note important support and resistance areas:

           USDJPY       EURUSD        USDCHF       GBPUSD
Res:  104.70-94    1.5549-93    1.0623-65    1.9637-68
Res:  103.95-30    1.5440-75    1.0513-40    1.9570-00

Spt:   103.12-39    1.5343-76    1.0441-73    1.9502-23
Spt:   102.66-84    1.5258-83    1.0373-00    1.9413-53

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