The US dollar and stock prices edged higher on Friday, as oil erased the entire week's gains with a 5.4% fall - the largest single day fall in oil prices in almost four years. The news of Russian troops puling out of Georgia was generally blamed for the fall in oil prices. Fed Chairman Ben Bernanke gave a balanced assessment of the economy at the Jackson Hole symposium on Friday, noting that the rise in the value of the dollar and the fall in the price of commodities strengthened the Fed's position on the current 2% target rate. Bernanke said the financial sector storm has weakened the economy, but pointed to the "highly uncertain" price outlook to stress that the Fed will take the necessary steps to ensure prices remain stable going forward. US stocks were steady despite Moody's downgrading Fannie Mae and Freddie Mac's preferred stock ratings to Baa3 from A1 on Friday. We put up a recommendation to go short EURUSD at 1.4858 and targeting 1.4350 on Friday. The combination of incremental weakness in the European economy and lower oil prices should keep the pressure on EURUSD in our view. Dour European growth conditions will dominate, and weaker-than-expected German PMIs point to a disappointing Ifo business climate survey this week. In contrast, we expect US Q2 GDP to be revised higher. Our stop-loss is at 1.5100.

Ahead today, we have the release of the existing home sales report for July (consensus and UBSe: 4.910M, after 4.86M in June) and the Dallas Fed's Texas manufacturing outlook survey. For the rest of the week, we have the August Conference Board confidence index on Tuesday (consensus: 53.0, after 51.9), July durable goods order numbers on Wednesday, July core PCE price index and the Q2 GDP numbers on Thursday (UBS expects an upward revision to 2.8% annual rate from 1.9%). The August 5 FOMC minutes will be released on Tuesday.

We put up a recommendation to go short EURUSD at 1.4858 and targeting 1.4350 on Friday. We note that the weak German manufacturing PMI is likely to have increased the probability for a weak print in the German Ifo business climate index due on Tuesday given their high correlation. Germany's finance ministry warned on Friday that the latest indicators suggest the economy is likely to 'lose vitality' in the months ahead. The export sector is likely to loose steam and the retail sales outlook is now cloudy. On the back or a weakening trend in growth data, the OIS market continues to look for ECB easing of 40bp over the next twelve months. Our economist expects ECB to cut rates by 75 bps during the same period. Going forward, we expect a trend of deteriorating growth conditions to remain intact, and this will most likely keep the EUR in a broad downtrend.

Separately for the SNB, our economists revised our rates outlook and are no longer looking for a rate hike by the SNB. Instead they expect the Swiss National Bank to keep their 3m LIBOR target at 2.75% at their September 18 meeting, targeting the mid-range between 2.25% and 3.25%, as growth worries outweigh inflation concerns.

UK's GDP numbers were revised to 0% from 0.2%q/q in data released Friday. The figure is the lowest since 1992 and pushes the annualised rate to 1.4%. Our economists note that the outcome highlights that an economic contraction may follow and the weakness was broad-based. Nevertheless we believe that the MPC will still avoid endorsing market expectations of earlier easing in the short term. The MPC minutes released last week showed only one committee member called for rate cuts to continue, and we believe it is necessary to stress that although the inflation report suggested easing is necessary if inflation undershoots, it will occur in the much longer term. Sterling bears have overlooked the BoE's own expectations that multiple letters to the Chancellor will be necessary in the coming quarters, and central bankers in general are still unwilling to call the top in inflation. We target EURGBP at 0.78.