The US dollar strengthened overnight on lower oil prices and disappointing corporate earnings in Europe, along with a stabilization in US consumer confidence. EURUSD fell from a high of 1.5725 to a low of 1.5553 while USDJPY traded up to 108.30 from a low of 107.67. Oil fell by US$2.93/bbl, ostensibly due to comments by OPEC President Khelil that prices were abnormally high. Equity markets rose sharply, boosted by lower oil prices, with the S&P500 up by 2.3%, while 2- and 10-year Treasury yields rose by 4bp respectively.

The Conference Board consumer confidence index for July rose for the first time since December to 51.9, vs the 50.4 reading in June. Meanwhile, the S&P/Case-Shiller 20 City composite home price index for May declined by -15.8% y/, vs -15.3% in April and moderately better than the expected decline of -16.0%.

Price action overnight is a reminder that the theme of slowing global growth will ultimately prove positive for the dollar as will enable central banks in Europe and elsewhere to cut rates, while the Fed at least is already positioned for lower growth.

In the US today we have the ADP estimate of jobs ahead of non-farm payrolls on Friday. Consensus looks for a decline of -60k. This is not weak enough to deter a further strengthening in the dollar.

Industrial production for June released this morning fell 2% m/m vs expectations of -1.7% m/m. The Japanese government has cut its outlook for industrial output. Yesterday, employment data for June showed the jobless rate rising to 4.1%, against expectations that the rate would stay steady at 4%. Following the labour market data the government warned that job conditions in Japan are deteriorating. However, household spending data came in slightly better than expectations at -1.8% y/y versus consensus of a decline of -2.8% y/y. While conditions at the margin are deteriorating, economic developments are still moving at a glacial pace leaving the yen a function of external factors such as oil prices, risk aversion and global growth. We continue to target USDJPY at 105 over 1 and 3 months. There is a lot of talk of month-end investment trust launches in the market. At the margin, this could keep yen weak heading into next week.

Regional CPI releases from German states were mixed. After a firm CPI release for North-Rhine Westphalia (weighting 23.5%), Saxony's headline rate also surprised to the upside. However, further releases for Hesse, Brandenburg and Bavaria all registered a decline from last month's figure. Our economists believe that final CPI will likely come in at 3.3%, in-line with our expectations and slightly above consensus of 3.2%. Eurozone CPI will be released on Thursday and we are still looking for a 4.1% headline print, more than double the ECB's target rate. In other data, the INSEE quarterly industrial survey showed further decline in demand in Q3, while the decline in industry jobs also accelerated throughout the second quarter and this trend is expected to continue. Consumer confidence in France fell further to -48, below consensus of -47. We expect the ECB to remain muted before the next CPI release but calls for some accommodation are expected to grow as industry and confidence surveys continue to point to further downside in the Eurozone economy.

Money supply and credit numbers disappointed again yesterday. Mortgage approvals fell to 36k, below expectations of 37k and well below last month's 41k number. At current levels approvals are already the weakest since the start of the series and less than a third of the peak in 2006. Our economists note that this figure is often a leading indicator for house prices and these levels point to further sharp falls in the months ahead. BoE data also showed consumer credit slowed to GBP0.9 bn, the lowest since 2000, and lending secured on dwellings fell sharply to GBP3.1 bn (cons. 3.7bn). In other data, the CBI distributive trades survey's headline balance fell to -36 after -9 previously. This is the lowest in 25 years and well below the long-run average of +25. However, the pound is off the day's lows and market reaction confirms our view that the pound's sensitivity to data is diminishing as BoE prospects continue to hang in the balance. In other news, acknowledging the difficult conditions prevalent for financial firms and its potential economic impact due to the prominence of the sector in the UK's national economy, reports suggest the Treasury is looking to lifting some taxes on investment funds to boost the UK's competitiveness for the asset management industry. Although the government's fiscal position is weakening, the government may be starting to heed calls for more support for the financial sector. We remain short EURGBP as a trade recommendation.

Consumption data in Sweden surprised to the upside as retail sales came in at 3.3% y/y, vs. 0.6% y/y expected and 1.3% previously. The 1.8% m/m gain (cons. 0.0%) also comes on the back of an upward revision to the May figure to 1.0%. The rebound may point to an upside surprise for GDP data on Friday and help boost falling confidence. We believe Swedish data should be interpreted cautiously as the Riksbank remains split. Firmer consumer demand would support Governor Ingves' case for a more hawkish outlook, but this would only prolong divisions within the Monetary Policy Board and any further destabilising elements would damage the SEK. Nevertheless, we expect more Eurozone weakness to boost the SEK as markets price in more divergence in yield paths between the economies. We target EURSEK at 9.45 in 1m and 9.40 in 3m.