Overnight, EURUSD traded from 1.4775 to a high of 1.4904 (at the time of writing). USDJPY traded in a range of 108.13-108.73. US equities marginally rose, the S&P500 closed with a minor gain of 0.25%, led by energy. Oil rallied to $121.49/bbl despite Wednesday's bearish crude inventory numbers and gold rallied to $836/oz, up 2.8% on the day. In the news, ECB Governing Council member Klaus Liebscher said that the Eurozone was unlikely to go into recession and inflation will remain high for a long time.

The dollar softened amid consolidating rate expectations moving in favour of EURUSD. The market is now looking for Fed fund rates to rise by 56bp in 12 months from now, scaling back its tightening expectations by 6bp. The ECB is expected to ease rates by 33bp - the market was looking for 43bp of easing yesterday. The fate of Fannie Mae and Freddie Mac continue to dominate headlines, though the current reaction differs from before. While agency spreads tighten and equities continue to fall, as market participants deem a government-led bailout to be closer than before, treasuries have not dropped. The resilience of the Treasuries is due in part to flight-to-quality but also on reduced concerns that GSE-related government action would lessen the credit rating of the US. The improved sentiment potentially stems from the fact that a consensus is slowly emerging regarding the bottom of housing prices (mid-2009). We continue to view recent gains in the US dollar as sustainable. There is no major data release in the US due today.

Eurozone services PMI's came in at 48.2 after 48.3 (cons 48). Manufacturing was up to 47.5 from 47.4 (consensus 47). Altough slightly better than consensus, the PMIs are still both below 50, signalling a contraction. Importantly for the area, German August 'flash' PMI was 49.9 from July's 50.9 and against an expected 52.2. The services PMI was 50.6 from July's 53.1 and a forecast 52.2.In other news, Germany's finance ministry warns that the latest indicators suggest the economy is likely to 'lose vitality' in the months ahead. The export sector is likely to lose steam and the retail sales outlook is now cloudy. Still, it said it was sticking with its 1.7% GDP growth forecast for this year and was also holding on to its belief that by 2011 it will not need to issue any more new debt. The OIS market continues to look for ECB easing of 40bp over the next twelve months. This expectation has hardly changed over the last week, as growth data in general continued to confirm a weakening trend. Going forward, we expect the euro to remain weak, in light of easing inflation expectations and expectations of continued economic weakness in Germany, the EU's growth engine.

UK retail sales gained 0.8%m/m, against expectations of a 0.2%m/m decline. However this dataset has been very volatile recently and our economists note the result is somewhat at odds with the surveys and the fundamental pressures on household finances. We still expect weaker consumer spending up ahead. The underlying inflationary pressures are still clear, however. The retail sales deflator rose to 1.6%m/m, the highest since May 1998 because of food prices, confirming the short-term inflationary pressures which seem to have lost attention since the BoE inflation report, which mentioned a longer-term decline in CPI should excess capacity continue to build. We remain short EURGBP as a trade recommendation as rate spreads remain stable and the UK economy may continue to marginally outperform the Eurozone up ahead.

In data released overnight, Norwegian GDP surprised to the upside, growing 0.6%q/q nationally and 1.0%q/q for the mainland, which excludes the oil sector (cons. 0.4% and 0.6%). However, growth in the first quarter was revised to show a contraction of 0.1%. Norges Bank also warned that growth is levelling out, but today's numbers do show that relative to the Eurozone the Norwegian economy is continuing to outperform. In the short term, our economists note that today's numbers supports our view that Norges Bank will hike in September, earlier than consensus expectations of an October move. There are clear upside risks to demand and prices coming out of today's report (private consumption up 0.3%q/q vs. 0.0%q/q prev.) despite weaker growth. In Sweden the unemployment rate came in better than expected, falling to 5.8% vs. expectations of 5.9%. A tight labour market and its associated inflationary effects would not be welcomed by the Riksbank and we expect the policy board to stay on a hawkish track. NOK and SEK may continue to perform against the euro if risk sentiment remains intact.

Japan's July trade balance came in at JPY91.1 bln, well below expectations of JPY 257.5 bln. The Figure was driven lower by a strong rise in imports, which jumped 18.2%y/y. Exports rebounded on the month, led by moderate gains in exports to the EU and especially Asia (up 4.1% and 12.7% respectively). Our economists note that the figures will continue to pressure GDP and we also expect industrial production to continue declining on a quarterly basis. Our economists warn that export volume continued to trend down and as such we remain cautious on the general growth outlook. BOJ monetary policy meeting minutes for July will be released later in the day.

Canadian CPI rose 0.3%m/m in July (consensus +0.4%m/m, UBSe +0.3%m/m). The core rate was up 0.1%m/m (consensus and UBSe +0.2%m/m). On Wednesday, Canadian retail sales rose by 0.5%m/m in June (consensus +0.4%m/m, UBSe +0.4%m/m); Ex-autos sales increased by 1.4%m/m (consensus +0.6%m/m, UBSe +0.7%m/m). Price-related gains in gasoline station sales (+4.2%m/m) were a key contributor to this month's overall increase in sales. In its last monetary policy report, the BoC highlighted that CPI could exceed their target, while peaking only in Q1?09, with higher commodity prices the driver. Note, the target range established by the Bank of Canada and the federal government extends from 1 to 3 per cent. Long-term inflation expectations derived from inflation linked bonds have eased to 2.5% from 2.7% along retreating oil prices. We are looking for USDCAD to consolidate with our 1month forecast staying at 1.05.