Fresh weakness in European economic data and the easing inflation threat given the sharp fall in oil prices had the market shifting its focus to growth from inflation in recent weeks. This has helped the USD, not due to any strong domestic data, but more due to the incremental weakness in other major economies, which helped balance some of the longstanding one-sided negative USD views. Friday's data releases encapsulate this broad USD view; the University of Michigan consumer sentiment index fell slightly short of the market's expectations at 61.7 (consensus: 62.0), while the survey showed long-term inflation expectations to have peaked at 3.2% from the highs of 3.4% seen in May and June. But we believe that investors are increasingly reallocating funds to the US, mainly on the notion that the US economy is better positioned for a further slowdown in global growth, while macro data in the Eurozone points to a steady continuation of last months' trend of deteriorating growth conditions. Due to improving prospects for the greenback we also think that dollar-related hedging activity of funds will continue to decrease, and under such conditions the positive correlation between the greenback and US equities will likely continue to increase. We expect this positive-USD environment to continue this week.

Looking ahead this week, the market is looking for an increase in PPI with stable core PPI. We note here that the recent decline in oil prices began too late to have much impact on the July PPI - our economists forecast another fairly large increase in total finished goods prices, but only a modest rise in core prices (UBSe and market expects core prices to maintain the 0.2% m/m momentum) - but a higher PPI could draw more attention to the inflation story. Fed chairman Bernanke will be speaking on "Financial Stability" at the annual Jackson Hole conference on Friday.

Ahead today, our economist expects a small rise in the housing market index (HMI) in the early August report (UBSe 17, consensus 16) from the historical low of 16 seen in July. Home sales are likely to remain depressed for a while by tightening lending standards, as well as the broad weakening in the economy.

There are few notable data releases due this week. The main focus will be on Tuesday's release of the German ZEW survey on economic sentiment, followed by services and manufacturing PMIs for July, which are scheduled to be released on Thursday. Our economists expect business activity to keep on deteriorating (EC Aug ZEW; UBSe: -64.3 after -63.7; German ZEW UBSe: -70.0, consensus; -62.8, after -63.9), providing a less constructive outlook on the Eurozone economy up ahead. Although lower oil prices might have supported sentiment, the outlook on the economy has deteriorated further in the last few weeks, likely keeping economic sentiment weak. Going forward we find a strong correlation between the ZEW- and the Ifo business climate survey, and any subdued reading would provide a first negative indication for the Ifo up ahead. Overall we expect incoming data releases to confirm a trend of weakening growth conditions, and as investors have shifted their focus away from inflation to growth such a development would keep the single currency under pressure.

The BoJ monetary policy committee meets this week and is yet again expected to keep rates on hold when the meeting concludes on Tuesday, as a gloomy economic outlook emerges from recent economic reports. We think the monthly report on Wednesday following the meeting is likely to highly emphasise downside risks on growth and it appears that recent warnings by senior BoJ officials to be more vigilant on inflation risks has gone unnoticed. The Merchandise Trade Balance will be released early morning Thursday and the results are expected to show ongoing weakness in external demand, symptomatic of the global slowdown. The July BoJ minutes will be released on Friday.

The UK housing woes deepen with the Rightmove house prices falling at a faster rate in August than a month ago at -4.8% y/y or -2.3% m/m. The overall market's sentiment was also not helped by talk over the weekend that the British Chamber of Commerce will be releasing a bearish quarterly economic forecasts this week, predicting a recession and calling for the Bank of England to cut rates aggressively in the months ahead. The BoE minutes from the August meeting will be released on Wednesday and the market is expected to monitor closely the deliberations which led to a somewhat surprising inflation report release. GDP figures for Q2 will be released on Friday and the BoE's projections for further easing in economic growth are likely to be realised. The market is looking for a softer quarterly growth figure of 0.2%. Private consumption is projected to grow by only 0.7% and imports should register another q/q fall of 0.4%. Exports is likely to increase to 0.5% but the BoE will be waiting to see if sterling's recent decline could boost export growth and provide a cushion for a weakening economy. We continue to target EURGBP at 0.78 in 1m and 3m.