EURUSD has broken sharply lower this morning in the aftermath of the ECB rate decision yesterday. EURUSD broke below 1.5315 on the back of EURJPY selling, which then triggered a flood of selling by real money accounts and EURUSD has traded down to a low of 1.5231. Meanwhile USDJPY has remained stable and has traded between 109.30 and 109.62 so far this morning. The dollar had been trending firmer anyway and interpreted ECB President Trichet comments overnight in a dovish fashion. Trichet emphasised the ECB's inflation mandate, but did note downside risks to the economy and said that he had 'no bias' with regards to rates - a phrase he used following the July ECB rate hike, which had disappointed market hopes of a sequential lifting of rates by the ECB. Oil is still below US$120/bbl, and should it remain low the perception will growth that inflation targeting central banks will be able to cut rates, helping to boost the dollar by default. The US dollar was also given a boost by pending home sales for June, which rose by 5.3% m/m, contrary to expectations of a 1% m/m decline. On a more negative note, jobless claims for the week ended August 2 rose by 7k to 455k, well above expectations for a decline to 425k from 448k in the prior week. While the US economy is deteriorating, it is too gradual to dislodge bullish dollar expectations currently. It is a very quiet day today in terms of scheduled events, both in Asia session and subsequent sessions. The dollar should remain firm and risk aversion should remain low. Hence, EURUSD should keep nudging lower and USDJPY higher.

The ECB kept rates on hold as was expected, and ECB President Trichet delivered fairly standard comments, which were interpreted in a dovish fashion by the market. He said that risks to price stability persist and that inflation is expected to remain above target for a protracted period of time. However, he also noted that downside risks to growth were materialising. Our economists argue that his comments were less hawkish, but not dovish enough to change their forecast for a hike in September. In other developments, German industry output came in below consensus at 0.2%mom (cons 0.8, UBS 0.5, May -1.8 revised up from -2.4). EURUSD has breached our forecasts, which are now pending review. It is possible that the market has moved too quickly, but the dynamics are broadly in line with our medium-term view. We do not expect a significant recovery in EURUSD from current levels.

Employment for New Zealand released yesterday rose by 1.2% q/q in Q2 following a decline of 1.3% q/q in Q1. Nonetheless, the unemployment rate increased 0.2 percentage points to 3.9%, 0.3 percentage points up from Q2 2007. Meanwhile, in Australia, employment rose 10.9k in July, after a 22.2k (was 29.8k) rise in June - a bit better than UBS (-10k) and consensus (+1.3k) forecasts. Overall, today's Australian data shows a labour market that is only gradually deteriorating. However, our economists note that forward looking indicators point to more significant weakness in jobs growth emerging through the remainder of the year. AUD has fallen sharply relative to NZD as deteriorating global growth expectations has caused base metal prices to fall. Also, the market has shifted to pricing in almost three rate cuts by year-end. This has caused to AUDNZD to deviate from its upward trend. However, at least in Australia investment should keep the economy supported and inbound investment from China should keep the currency relatively supported. What means is that AUDNZD can still trend higher and the current levels are very tempting to buy with that in mind.

The Bank of England kept interest rates on hold and did not release a statement, in line with market expectations. The minutes will be released on August 20th but discussions likely centred on inflation rather than growth. Although PMI data released this week, in addition to consumer confidence numbers have disappointed to the downside, CPI remains at elevated levels and deliberations over next week's inflation report likely dominated today's proceedings. Comments by MPC members have suggested further gains in headline CPI, after last month's 3.8% print and the recent hike in utility bills will have an effect on price levels. Nevertheless, oil prices remain under pressure and under current trends, the inflation report may signal a peak in CPI in the coming months, the point at which the MPC may be able to contemplate easing. On balance, short-term risks favour a more hawkish BoE and we remain short EURGBP as a medium-term trade recommendation. In other data released today, HBOS House Prices showed a 1.7%m/m decline and an 8.8% annualised three month decline, lower than market expectations of -1.5%m/m, -8.6%m/m. Our economists note this is consistent with recent mortgage lending numbers, whose decline had indicated further weakness in house prices.

Swedish CPI came in at 4.4% yesterday, up from 4.3% previously and in line with consensus. However, core CPI undershot expectations, falling by 0.3% on the month and keeping the annualised rate stable. Our economists note that inflation has now surprised upside expectations for two months but the policy decision in September is still likely to be close, especially given weak growth prospects and deep divisions on the policy board. A near-time hike is still possible but falling oil prices and slowing demand may give the doves the upper hand in upcoming meetings. Market expectations for further hikes may remain elevated as headline inflation-the Riksbank's focus measure-heads higher but this is unlikely to be sustainable. In Norway, industrial production came in at -0.7% m/m, well below last month's 1.6% print. Manufacturing production was not as bad as expectations, but a 1.2% m/m decline (cons. -1.2%, UBSe. -0.8%) points to further weakness ahead for the economy. We remain moderately bearish on the Scandies in the short-term.

The Canadian dollar has had a rough time this week, losing almost 3% against its US namesake thus far. While the break above the recent range top at 1.0300 on Monday explains much of the USDCAD buying that followed, so do weaker commodity prices in general; lower oil prices, of course, factor heavily. A widening of USD-CAD yield spreads has played a role, too. Indeed, 2y yield spreads hardly favor the CAD anymore, having moving from -80bp to -26bp. And, overall, lower G10 growth expectations ex-US put the greenback in a better light. Our 1m USDCAD forecast of 0.97 is under review, but our 3m target of 1.02 still looks plausible. To be sure, the dynamics behind the breakout of the 0.98-1.03 range skew risk to the upside. What's more, with oil prices having come off recently and economic data continuing to disappoint, any BoC shift in focus towards growth concern would further undermine the CAD. The July employment report due today is expected to show an unemployment rate of 6.2% and job growth of 5k.