In a lacklustre session, EURUSD traded up to a high of 1.5930 from a low of 1.5832 while USDJPY traded down to a low of 106.40 from a high of 107.16. Equity markets were slightly lower on Monday, with the S&P 500 down 0.1%, despite a major bank earning announcement coming in better than expected. US Treasury yields also finished slightly lower, with the 2-years down by 3bp on Friday's close and the 10-years down by 4bp. Oil closed higher at US$131.15/bbl up from US$128.88 on Friday, boosted by inconclusive nuclear talks between Iran and the US on the weekend and also by Tropical Storm Dolly threatening the Gulf of Mexico.

The Conference Board leading economic indicator met expectations at -0.1% m/m, vs the downwardly revised -0.2% (prev.+0.1%) m/m increase in May. Treasury Secretary Paulson spoke and unsurprisingly assured the market that the US banking system was safe and said that GSEs are key to resolving the housing market as they are the only functioning secondary market source for mortgage securities.

On the data front this week, key releases include the Fed's Beige Book, existing and new home sales, durable goods orders for June and the University of Michigan confidence index for July. We continue to target EURUSD at 1.60 in 1m but expect a retreat to 1.53 in 3m as retreating headline inflation begins to contain the need for aggressive policy elsewhere in G10. We are also short EURGBP as a trade recommendation targeting 0.74. Ahead today, Paulson speaks at 1200 GMT, while Fed's Plosser speaks at 1230 GMT. Data today includes the house price index for May at 1400 GMT.

German Finance Minister Peer Steinbrueck said on the weekend that growth could beat forecasts for 2008 and 2009, and that there should be no talk of a potential recession up ahead. According to the finance ministry growth is expected at 1.7% in 2008, followed by 1.2 % in 2009. However, we expect German growth conditions to continue deteriorating and it becomes less likely that the German economy will keep on counterbalancing the more severe situation in the rest of the currency union. In such a scenario it will become increasingly complicated to argue for further tightening in rates, although inflation rates remain at multiyear highs. However, and on the back of lower energy prices inflation expectations decreased last week, and further downside in crude oil prices will likely support ECB members in applying a less hawkish rhetoric up ahead. This week investors' main focus will be on the German IFO Business Climate survey which will be released on Thursday. We expect the release to be of heightened importance to rate expectations up ahead, and a significant surprise to the downside may force the ECB to review its outlook. Elsewhere, a story in the Financial Times reported that French President Nicolas Sarkozy is seeking more political accountability from the ECB, which would involve regular publication of Governing Council minutes and encourage political leaders in Europe to have a more open debate with the bank. The current French EU presidency is expected to be more vocal on the ECB's role but we doubt any substantial challenges to the ECB's independence will surface.

At 4.5% y/y (cons. 4.3%, previous: 3.9%) Swiss producer and import prices for June were released above market expectations, keeping worries over price pressures high. Our economists expect the SNB to tighten rates at their next policy meeting in September in order to keep inflation expectations anchored. However, for now we believe the franc will remain driven by risk sentiment. We expect investors to remain strongly focused on earnings, and if the overall environment remains constructive the franc will stay weak.

In data released yesterday, Rightmove House Price indices showed another 1.8%m/m decline in prices, pushing the y/y figure to 2%, below last month's 0.1% reading. This is the first y/y drop since the Rightmove survey began in August 2002, and the report also warned that unsold homes per agency branch have hit a record high. Weak housing reports have become customary for UK data releases and the market's response has become increasingly muted. Nevertheless, other demand-side elements of the economy will struggle to recover while the housing correction continues, and the Bank of England will find it difficult to target inflation as a result. Also yesterday, BoE's Blanchflower-the MPC's most dovish member-called for a rate cut as he expected 3-4 quarters of a recession. We believe such fears are overdone, and we believe further deterioration in Eurozone data will put pressure on stretched long EURGBP positions. We are short the cross as a trade recommendation and target a return to 0.74.

Australian PPI for Q2 released yesterday rose by 1% q/q, well below expectations for a rise of 1.6% q/q. While core producer prices rose by 0.7% q/q, down from 1.6% in Q1, a breakdown of the data reveals accelerating inflation pressure from upstream producer prices. Still the lower headline level will reduce expectations for Q2 CPI due Wednesday. As of surveys conducted last week, the market expects core Q2 CPI to rise by 1.1% q/q. Meanwhile, in NZ the ONE News Colmar Brunton Poll pointed to a further deterioration in confidence in July. The RBNZ meet on Thursday and consensus is calling for a rate cut in September. New Zealand is likely to be the first central bank other than the Fed to being making steep cuts to policy rates, to the likely detriment of the NZD. The markets are pricing in 14.5bp of rate cuts at this week's meeting - i.e. a better than even chance of a 25bp rate cut. We think NZD will remain weak and maintain our 3-month target for AUDNZD at 1.27.