The US dollar traded in a rollercoaster fashion against the euro overnight, as softer than expected jobless claims and GDP initially drove it weaker. EURUSD traded up to a high of 1.5705 after which a decline in oil prices helped push EURUSD lower again, eventually down to a low of 1.5573. This morning the focus in on the antipodean currencies in light of a dovish article on the RBA published in one of the Australian newspapers. In the US, equity markets retreated with the S&P500 down 1.3%, while 2-year yields fell by 12bp to 2.52%. Oil fell $2.69 to $124.08/bbl.

US advance GDP for Q2 rose 1.9% q/q vs. 0.9% in Q1 (prev. 1.0%), but below expectations for 2.3%. Initial jobless claims for the week ending July 26 rose by 44k to 448k, well above market expectations for 393k and are much more consistent with prior recessions. Finally, the NAPM-Chicago PMI for July rose to 50.8, versus the 49.6 reading that occurred in June and the first reading above 50 since January.

Rising risk appetite continues to help EM currencies against the US dollar. Against the EUR, however, the dollar may well remain firm. EURUSD rallies have been muted so far, carrying risks that the pair tests the lower end of its 1.53-1.60 range. European data increasingly shows signs of fatigue and the unemployment rate has yet to bottom. Inflation prospects will remain key, but our economists forecast it to peak at 4.3% - with risks to the lower side given the recent retreat in oil prices. Also supportive for the dollar, the US alone is providing both monetary and fiscal stimulus aggressively, remaining ahead of curve as G10 countries face economic adjustment. Much depends on whether the recent bright spots in US data become a trend. But compared to deteriorating growth and sentiment numbers in the Eurozone, the dollar remains well-placed to strengthen as expectations of a recovery rise.

Ahead today, non-farm payrolls for July are due at 1230 GMT and our economists expect jobs to contract by 70k, more or less in line with consensus. The ADP estimate earlier in the week pointed to a much better number. Also due today is the manufacturing ISM for July at 1400 GMT.

The AUD has fallen sharply this morning on the back of a local newspaper article arguing that the RBA is on the verge of starting its easing cycle. The RBA has a reputation for communicating policy shifts to journalists before actually going ahead with them so the market is treating the report with respect. Certainly, yesterday's retail sales data for June was soft, declining by 1% m/m, but not weak enough in our view to warrant such an aggressively dovish stance by the RBA. It could be that the RBA is responding to developments at the commercial banks that we are not aware of. Either way, the AUD will remain under pressure while this gets priced into the markets.

The cross to watch however is NZDJPY. The weakness in AUD will likely drag down NZD with it and put pressure on extreme long NZD positions held by Japanese margin traders. Total long NZD positions at the TFX as of Wednesday were Y162bn, up from Y157bn on Tuesday and Y145bn on Monday as Japanese margin traders relentlessly bought the dips. They will have to fold at some stage and their position reduction will overwhelm the relatively illiquid NZD. Remember the TFX is less than 10% of margin trading activity in Japan, so overall long NZD positions on margin in Japan are likely over Y1.62 tn.

Eurozone CPI increased to 4.1%, in line with expectations and a touch higher than last month's 4.0% print. HICP came in at 4.1%, slightly lower than consensus estimates of 4.1%. Nevertheless, the figures will be difficult for the ECB and our economists only expect CPI to peak in August, which may translate to more hikes in the pipeline. In comments released yesterday, ECB's Wellink and Quaden continued to stress the importance of managing inflation expectations, though Quaden noted that medium-term inflation expectations are still anchored around the ECB's targets. Neither official expressed explicit worries about growth, but Wellink acknowledged the situation remains difficult for the central bank as economic weakness sets in. In other data, Euro area unemployment rate was revised higher to 7.3% from 7.2%, German unemployment came in at 7.8%, in line with expectations. Our economists note that job creation ceased in June and the labour market is loosing steam. Worries over labour markets will hurt consumer sentiment as income expectations decline, and this will hurt demand in the Eurozone. This week's releases showed general declines in consumer and business confidence across the Eurozone and the pace of deterioration shows no sign of slowing. We believe that inflation expectations in the Eurozone have been easing as oil has fallen markedly in recent weeks but the ECB may want to maintain its vigilance as inflation is yet to peak. We are short EURGBP as a trade recommendation as growth conditions continue to weigh on the central bank's policy view.

The widely-watched Nationwide house price index fell at a record 8.1%y/y. Facing prospects of higher inflation and falling incomes, the GFK consumer confidence index fell to -39, also the lowest reading since the survey began more than three decades ago. Declining house prices and its impact on consumption remain crucial threats to the UK economy but ongoing concerns over inflation remains a barrier to interest rate alleviation. In comments made yesterday, BoE hawk Besley warned that interest rates are only "mildly restrictive" but justified given current inflation risks. In addition, he voiced serious reservations over any relaxation in the government's fiscal rules as this would hamper policy credibility. Besley is a hawk on the MPC but his vote for a hike at the last MPC meeting boosted sterling but risks remain balanced for now. We expect the BoE to remain neutral but inflation risks may intensify costs across sectors rise.

Swedish manufacturing confidence slumped to -9.0, far worse than market expectations of -1.0 and last month's 3.0 print. Consumer confidence also declined sharply to -18.2 vs. expectations of -12.0. Finally, the economic tendency survey for businesses fell to 89 from 93.8 previously. Our economists note that yesterday's sentiment surveys lend support to a below-consensus view on Swedish growth. The monthly surveys also suggest that Q3 is likely to stay weak and growth may dip below 2%. Most sectors of the economy are already performing well below average but rising inflation expectations may continue to weigh on the Riksbank. The data once again may cause markets to question whether the Riksbank's current stance is appropriate and may deepen divisions if today's GDP numbers surprises to the downside significantly. In Norway the unemployment jumped to 1.8% vs. 1.5% previously and credit growth weakened to 13.3%y/y. Lending to both households and non-financial corporates fell.