The good done to the US dollar on Wednesday by lacklustre European and UK data came somewhat undone when crude oil surged anew. WTI made the most of a higher-than-expected crude draw, and a big draw in gasoline inventories, rising to a high of $117.46/bbl before settling around $116/bbl. The dollar ended mixed, ceding ground to the euro (1.4929 at the time of writing) but gaining on the yen (109.52). Commodity bloc currencies strengthened alongside oil. Equity markets were slightly down on the day due to ongoing concern in the financial sector. Despite today's price action, we expect the dollar to remain a buy on dips.

In economic data, retail sales came in at -0.1% (UBSe -0.7%, 0.3% revised), retail sales ex-autos at 0.4% (UBSe 0.2%, 0.9% revised) and import prices at 1.7% (UBSe 1.9%, 2.6% previously). Given recent revisions, our economists estimate an upward revision to Q2 GDP. Ahead today, CPI figures (UBSe 0.4% m/m, 1.1% previously) and initial jobless claims (UBSe 450k, 455k previously). Minnesota Fed President Stern will speak in the afternoon on the US financial shock.

The commodity currencies and the euro gained on the yen overnight with the higher move in oil. The yen lost ground on the dollar as well, mostly on the back of moves in EURJPY. In data released Tuesday, Q2 GDP showed a 0.6% decline, in line with market expectations and down from 1% previously. The annualised rate came in at -2.4%, below market expectations. Our economists note that the Q2 result has confirmed a clearer sign of a slowdown in activity. Domestic demand fell by 0.3%y/y from -0.2%y/y previously, and two consecutive quarterly declines have note been since Q2 2002, during which three consecutive quarterly declines in demand were seen. The weak external sector has compounded the situation as export growth fell to 6.4% in Q2, well below 11.1% in Q2. We highlighted recently that Japan's export situation reflects weaker demand globally for capital goods and the outlook is not optimistic. For Japan, capital expenditure was not as weak as expectations but there is a good chance that this will be revised lower when the Q2 revision is announced. We target USDJPY at 110 in 1m and at 111 in 3m.

June industrial production was released below expectations at -0.5% y/y and 0.0% m/m, supporting the view of further deteriorating growth conditions. Our economists note that with both manufacturing and services PMI in contraction territory, and business sentiment at depressed levels, the trend of weakening industrial production is likely to continue. In Spain, harmonized CPI was released at 5.3% y/y (previous: 5.1%), inline with market expectations. The most recent inflation data released in Spain, France, and Italy suggest that there will be no revision to tomorrow's flash estimate on the Eurozone level, leaving inflation for July at 4.1% y/y. However, the risk remains to the downside, and our economists note that smaller countries could push it for a 4.0% y/y rate. The final reading on inflation for July will be released on Thursday at 09:00 GMT. Before that, the release of German GDP will likely be the focus, and our economists expect growth to disappoint market expectations. Under such conditions we expect the single currency to remain weak up ahead, and regard the EUR to stay a sell on rallies, especially versus the greenback.

The quarterly inflation report from the BoE was released Wednesday and its central projection pointed to further gains in headline CPI under current market yields. However, inflation is expected to fall sharply to "a little below target in the medium term", due to declines in energy, commodity and import prices. Our economists note that inflation is set to fall below the 2% target at the key 2-year mark on a downward trajectory, assuming both constant and market rate assumptions, suggesting that a rate cut is required to bring inflation back to target. The report also cited significant uncertainty over the economic outlook but the greater emphasis on downside risks, especially the possibility of inflation undershooting the target due to excess capacity generated by weak demand and growth, has hurt sterling significantly. Nevertheless, the report warned of explanatory letters over the next 12 months (with inflation to peak at above 5%) and in the short-term upside risks dominate. Similar to the ECB last week, more deliberations over the impact of downside risks have undermined the outlook on the currency. Our economists warn that a November cut is possible if activity is shrinking. Nevertheless, sterling's rate differentials have not suffered material damage, especially against the ECB where cuts are expected to move in tandem. We continue to expect limited upside in EURGBP and target the pair at 0.78 in 1m and 3m.

Wages in Australia increased by a record of 1.2% during the second quarter (UBSe 1.1%, cons. 1.0%) and has pushed the y/y pace up to 4.2% from 4.1% previously. This has clear implications for RBA expectations and may temper talk of easing. Our economists note that today's release represents an unwelcome pick-up in wage pressures in Q2 after some evidence of moderation in Q1. They also state that with wage growth still elevated, it is too early to suggest the clear risk on wage pressures has passed, with previously tight labour markets and labour shortages. The market has aggressively front-loaded expectations for RBA cuts and this continues to weigh on the AUD. The carry trade showed more signs of strain overnight and AUDJPY has already fallen almost 10% from its July peak. RBA cuts up ahead will hurt the currency but we believe recent moves are overdone and risks of a rebound in commodity prices will prove more supportive. We target AUDUSD at 0.89 in 1m and 0.87 in 3m.

Norges Bank held rates at 5.75%, in line with market expectations, although a sharp rise in underlying inflation had increased chances of a surprise hike prior to the meeting. In the post-meeting statement, upside risks to inflation were emphasised and the Executive Board warned that underlying inflation now appears to be close to 3.5%, 1% above their target. Our economists note that if inflation does surprise to the upside again in August, a probability of a hike in September-which we expect-will rise further. The statement noted that the June projections for policy rates, i.e. the deposit rate staying on hold or "somewhat higher" remains unchanged, but there are 'signs of slower growth" for the Norwegian economy while there will be a rapid slowdown in Europe. With ECB expectations keeping the EUR on the back foot, significant upside is limited for EURNOK, but this may be offset slightly if oil prices continue to falter. We retain a cautious outlook on the cross and continue to target EURNOK at 8.10 in 1m and 3m.