The US session was all about interpreting the authorities' steps to support Freddie Mac and Fannie Mae that Treasury Secretary Paulson announced on Sunday evening. EURUSD traded in a 1.5844 to 1.5934 range, while USDJPY traded down to a low of 106.05 from a high of 106.76. Most notable was the decline in Treasury yields, reversing their move on Friday. The 2-years fell by 14bp and the 10-years fell by 10bp, suggesting that the market has concluded that the GSEs will get the majority of their support through the Fed discount window rather through tax-payer funded capital injection. If that is the case, then the support measures announced are negative for the dollar, since money supply would likely be expanded. Any whiff that the authorities will adopt steps to monetise the problems facing the US housing market would be the trigger to drive EURUSD through the 1.60 mark. The heightened problems with the GSEs and the failure of IndyMac on Friday have made us more negative on the dollar as the risk of another round of de-leveraging centred on the household sector has increased. Ahead today, Fed Chairman Bernanke is scheduled to deliver his semi-annual monetary policy testimony. We expect he will strike a fairly similar tone to that of the June 25 FOMC statement. Our US economists continue to call for two rate cuts by year-end in contrast to market expectations and the latest developments are supportive of their views. In addition, PPI and retail sales for June are due at 1230 GMT. The market expects sales to rise by 1% m/m following the 1.2% m/m decline in May.

The BoJ's two-day board meeting concludes today. No policy change is expected, with the decision typically announced around 0330 GMT. The BoJ also releases its monthly report at 0600 GMT. This afternoon's report is the half-year update, and could include downward revisions to the economic outlook. BoJ Governor Shirakawa holds a press conference at 0630 GMT, with headlines typically hitting the wires at a lag of around 45 minutes.

Industrial production for May fell by 0.6% y/y, worse than consensus expectations of a gain of +0.3% m/m. Our economists note that the drop in May suggests that German GDP growth could turn out negative. The most recent data is in line with last few weeks? trend of deteriorating growth conditions in the whole Eurozone, considerably complicating the ECB's policymaking going forward. Although growth is increasingly at risk, the ECB's most recent rhetoric remains fully focused on the anchoring of inflation expectations, which remain at elevated levels. Indeed, and if inflation expectations keep on rising we do not exclude further tightening in rates, irrespectively of its short-term impact on the economy. Our economists already expect the ECB to tighten rates once more this year, before turning neutral. Going forward, we expect hawkish ECB comments and elevated inflation to keep on supporting the single currency.

Like-for-like retail sales released this morning fell by an annual -0.4pct in June as consumers cut back on most items except groceries. Total sales rose by 2.1%, less than half of last month's increase. Meanwhile, RICS house price eased slightly in June to -88.0 in June from -92.2 in May. The reading for London house prices was -80. Yesterday, core output price inflation for June rose by 0.3% m/m, less than market expectations of 0.8% m/m. However, the y/y rate was at a elevated 6.3% y/y. The data overall suggest only limited relief regarding decreasing price pressures. However, today's CPI release will be key in guiding market expectations up ahead. We are looking for a flat 3.3% reading but the market is expecting a sharp rise in prices, reflected in a 3.6%. Labour market reports will also be out, but in the short-term the BoE will be worried about rising labour costs and its associated inflationary effects, rather than any softness in job creation. The ILO unemployment rate is expected to stay at 5.3% while we expect average earnings (incl. and excl. bonuses) in May to rise by 4.0% y/y. The BoE is the only central bank in European majors where we do not expect another hike by year-end, especially in the face of its economic difficulties. EURGBP has rebounded to above 0.80 and as other central banks in the region look to hike in Q3, we still expect the GBP to stay under pressure.

CPI for Q2 was released this morning and rose by 1.6% q/q, beating market expectations of a rise of 1.4% q/q. In y/y terms Q2 CPI grew by 4% y/y versus consensus of 3.8% y/y. However, most of the positive surprise appeared to come from petrol, with non-tradeables inflation growing by 0.9% q/q, matching the RBNZ's own projections. NZDUSD initially traded higher on the headline print, but reversed the move once details on the breakdown were digested.