By Chris Tedder, Research Analyst FOREX.com

It was an interesting session during Asian trade with some very jumpy price action in the FX market due to low levels of liquidity, with many investors choosing to remain on the sidelines ahead of the US holiday. Early in the session, low volume created a divergence between risk currencies with the euro pushing lower at the same time as commodity currencies were moving towards their overnight highs. But the currencies were shocked back into moving in sync on the back of better than expected retail sales data out of Australia, which sparked a small USD sell-off in the low liquidity environment. The exception, however, was the yen which moved against overall sentiment throughout the session.

Retail sales in Australia increased 0.5% m/m, modestly higher than the expected 0.2% increase. Surprisingly, food sales were the biggest loser in May, dropping 0.1%. But a strong bounce-back in the household goods, department stores and restaurants sectors more than offset the weak showing from food sales. At the same time, the prior month's figure was revised up to +0.1% from -0.2%. Overall, the data is a positive sign that consumer sentiment is turning around.

However, the retail sales data is not enough to stop the RBA for continuing its rate loosening cycle, unless we see the trend continues throughout the economy ? i.e. CPI rise above the bottom-medium of the RBA's target range for inflation. Given the recent CPI prints, we are more leaning towards fairly low inflation prints in the Q2 report released later month. Hence, we maintain our view that the RBA will cut rates in August, largely in response to the Q2 inflation report providing significant scope for more easing.

AUDUSD rocketed through 1.0300 on the back of the retail data, before retracing all of its gains. We think the low volume environment is amplifying the moves in risk currencies, similar to what we have seen in the past when there is a major public holiday or significant event that causes investors to watch rather than get involved. The price may have created a new short-term ceiling for the pair around 1.03200, at least until the ECB/BOE meetings tomorrow night.

The euro pushed through 1.2600 against the dollar early in the session, this level then acted as resistance for the pair. NZDUSD found some resistance around its overnight high around 0.8065, before dropping back below later in the session. The kiwi has been trading in a fairly tight range against the dollar since the pair broke through 0.8000 at the end of last month, thus a break on either side may lead to more upside/downside depending on the direction of the break.

Tonight, investors will be wary of the low levels of volatility but will also be on the lookout for headlines from the Merkel/Monti meeting in Rome to discuss the recent EU summit and economic cooperation. Whilst not much is expected from the meeting, there is the possibly that something will be leaked or announced.

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