The US dollar strengthened overnight as ECB President Trichet warned markets that he deplored volatility in exchange rates. This was seen as a signal that the Europeans at least would push for tighter language in the G7 statement following today's G7 meeting. EURUSD traded from around 1.5890 levels down to a low of 1.5721, while USDJPY traded up to a high of 102.05 from a low of 100.03. US equity markets finished in positive territory helped by a decline in jobless claims and news that a major US retailer raised its outlook. Initial jobless claims fell to 357,000 in the week of April 5 from 410,000 in the week prior. The NY Fed revealed that the latest Term Securities Lending Facility (TSLF) auction had a bid-to-cover ratio of just 0.68. The implications are that either liquidity pressures are easing, or the facility is not proving very useful to participants. The latter explanation seems more likely given 3-month libor-ois spreads are still trending higher. The G7 meet today and the focus of the G7 meeting will be on improving liquidity in response to the credit crunch. Any announcements on this front could be supportive of risk appetite in the short-term, but we would be sceptical of any sustained improvement in risk appetite. Also, if the G7 fails to harden its language at least on FX volatility then the knee jerk reaction on Monday would likely be to sell the USD. Trichet's comments that he deplores FX volatility suggest that at least the Europeans will be arguing for tighter language. Please see our foreign exchange note, 'G7 - Regional Differences Key', for a discussion on some of the issues. Overall, barring short-term moves, we think the US dollar will strengthen and target EURUSD at 1.55 over one month and 1.47 over three months.

Ahead today, Uni of Michigan consumer sentiment for April (preliminary reading) is due at 1355 GMT. The G7 communique is due at 2245 GMT.

The BoE lowered interest rates by 25bp to 5% as was widely expected. The accompanying statement highlighted the dilemma of high inflation versus slowing growth but on balance the tightening of credit conditions recently warranted immediate action The MPC noted that the weakness in GBP will help exporters but that the outlook for global growth had worsened. Overall, the statement was very much in line with expectations and, as is typically the case, there was no guidance on policy rates going forward. Our economists expect another 75bp of rate cuts by the BoE this year, but given the BoE's ongoing concern over inflation, the rate cuts will be gradual.

The ECB left policy rates unchanged as expected and President Trichet's subsequent commentary with respect to monetary policy indicated that he was still preoccupied with insuring that inflation expectations don't pickup in response to the "protracted but temporary" bout of inflation. More importantly for the FX markets, Trichet said that he deplored FX market volatility, which was seen as a signal that the European would push for tighter language on currencies in the G7 communique following today's G7 meeting in Washington.

The REINZ has delayed their house sales data for March yesterday and will be released at 0200 GMT this morning. The unsubstantiated speculation is that the data is sufficiently bad that it requires re-checking. Meanwhile in Australia, employment for March released yesterday rose by 14.8k, exceeding market expectations of +10k. The data provided the AUD a boost, which rose from 0.9300 levels up to a high of 0.9346. As our economists note, employment is a lagging indicator and other more coincident indicators such as retail sales, credit, business conditions and confidence have already turned. The fact that AUD rose as much as it did suggests that the market has begun positioning for bad news on the AUD. We agree but we will have to be patient - we maintain our 1 and 3-month targets for AUDUSD at 0.9100. There is probably some further upside to AUDNZD, but the market already quite long the pair and so upside may be limited. More success may be had in selling NZDUSD or AUDUSD outright.

March core CPI released yesterday showed the rate increasing at 0.6% on a monthly and at 2.1% on an annual basis. Although the outturn was in line with expectations, the core number was higher than Norges bank's own forecast of 2% y/y. Our economists maintain their view Norges Bank will stick to its tightening bias, as it has signalled in its latest Monetary Policy Report in March. While the ECB will likely stick to its hawkish line, it is unlikely to tighten policy rates this year. This should continue putting pressure on EURNOK, lowering the pair back towards 7.80 over three months. In Sweden, February industrial production rose 0.3% m/m and 1.9% y/y, below the consensus of a 0.4% m/m and 3.3% y/y rise respectively. March unemployment rate fell to 3.2% from 3.3% in February. We maintain a NOK bias over SEK and continue to see NOKSEK trending higher.