EURUSD rebounded from a low of 1.5510 to a high of 1.5644. USDJPY posted a 103.70-104.89 range, while crude oil June futures traded in a 116.70-113.30 range. The S&P500 failed to hold above the 1400 level, closing in minor negative territory (-0.38%), the Dow ended flat on the day. In the news, ECB council member Garganas said that inflation expectations have bee "firmly anchored"

The FOMC took the center stage in New York Wednesday afternoon. The statement had a spin towards at least a pause in the easing cycle after the Wednesday 25bp move. Interestingly, the reference to "downside risks" was dropped, making the policy/risks paragraph technically neutral rather than biased toward more easing. Our economists think that the overall tone of the statement was still consistent with more easing being more likely than renewed tightening in coming months. We think that under such conditions, the dollar can continue to do well against the EUR, GBP and the CHF. A poor showing from Switzerland's April KOF on Wednesday, 1.20 vs. expectations for 1.48, lengthens an ever-growing list of disappointing European data. We don't think the market is positioned for this earlier-than-expected slowdown. We therefore like buying the US dollar generally, against European currencies specifically. At 0.37 versus 0.44 the prior day, our Risk Index for FX showed risk appetite hitting a 7-month high, though caution persists as credit spreads remain well above the lows seen before the subprime crisis began. Historically, such marginal shifts have supported long USD positions. Our high frequency global growth expectations indicator has continued to move higher, too - leaving a gap to the dollar (Chart1). We remain short EURUSD from 1.5665 targeting 1.5200. Our three month EURUSD forecast is 1.47.

Ahead today, the data focus will shift to Initial Jobless Claims (UBSe: 365, 4-wk av 360, cons. 365K) and the ISM Manufacturing Index (UBSe: 47.5, cons. 48.0, prior 48.6).

Overnight, the BoJ voted to keep rates on hold at 0.5% for the sixth straight meeting. The vote was unanimous and markets paid little attention to the expected result. More worrying for the BoJ are overnight data releases, which showed a 3.1% m/m decline in industrial production, much weaker than expectations and pushing the annualized figure into negative. Household expenditures were also down 1.6% y/y, weaker than market expectations for a 0.6% rise. Although macro data has been sliding over the past few weeks, inflation worries have dampened market expectations for BoJ cuts and investors remain reluctant to cut holdings of safe-havens excessively in the current risk environment. The BoJ Outlook Report released also today downgraded the bank's fiscal 2008 economic outlook to 1.5% from 2.1% previously, while upgrading its CPI outlook to 1.1% from 0.4% previously. Both IMM and TFX positioning data have shown some new interest in the carry trade, but as the recent risk rally has likely run its course, headwinds for the yen will probably stay weak.

The Eurozone's CPI estimate for April came in at 3.3%, lower than market expectations of 3.4% and is the first decline since August last year. A weaker print was expected after the sharp drop in German and Spanish inflation, though our economists note that the firm number points to CPI holding up in other European countries. The ECB will need to see inflation actually trending lower before signalling an ease and markets remain doubtful that any cuts are feasible this year, but falling sentiment may prompt the central bank to follow the Fed and BoE to cut to contain economic deterioration. Sentiment indicators across the Eurozone came in weak overnight. The business climate index dropped to 0.44 from 0.80 in March (cons. 0.70), economic sentiment fell to 97 from 99.6 (cons. 99). Bother industrial and services sentiment fell, while only consumer sentiment was flat. Weaker national sentiment readings over the past month had already pointed to such an outcome and calls for monetary accommodation from the ECB will only grow up ahead. ECB rhetoric will likely remain to the hawkish side in the short term, as inflation expectations have failed to come down and input costs remain high. The European Commission stated overnight that inflation data should be treated with caution, subscribing to the ECB's current stance. However, more disappointments in zone-wide and national PMI readings next week may cause the ECB to further shift its language at its policy meeting and stress downside growth risks, rather than price stability, will be the key focus for the central bank up ahead.

At 1.20 (cons. 1.48), the KOF leading indicator for April came in considerably below market expectations, and last month's reading was revised to 1.40 from 1.54 previously. Our economists note that the poor reading was mainly driven by the sub-index of the credit industry. Overall the latest reading confirms the outlook of faltering growth momentum in Switzerland, and our economists expect the SNB to start easing rates by Q3'08. Going forward, inflation is expected to ease, enabling the central bank to employ such a departure from its on-hold policy stance.

More evidence of a poor outlook for the pound came from UK consumer confidence and house prices surveys Wednesday. April Gfk consumer confidence survey released overnight showed the index falling below market's expectations to -24, its 15-year low. At -1%, the Nationwide survey reported the first annual decline in the house prices. Weaker oil prices are also not good news for the pound given a higher attribution of weighting to the GBP in the portfolios of sovereign wealth funds. MPC member Blanchflower in a speech last night noted the pound may continue to fall further, suggesting the BoE is actually encouraging weaker currency. An interesting take-away from BoE Governor King's testimony to the Treasury Committee Tuesday was his point that retail sales in Q1 was very strong while consumer spending is now set to slow. With the Fed signalling a pause while the ECB is close to resuming easing, selling cable at current levels seems the best way to be bearish sterling now. We are looking for GBPUSD to come off to 1.93 in three months.

Norges Bank's Q1 Bank Lending Survey released Tuesday showed ongoing tightening of credit standards by Norwegian banks. While lending to corporates and households was under tighter conditions compared to the previous quarter, commercial real estate sector saw considerable increase in lending standards. The survey, introduced only this year, provides evidence concerns over the prolonged credit crisis have started to bite the Norwegian economy as well. Credit growth expanded 13.9% in March, its five-month low from 14.2% in February. In contrast, March retail sales disappointed the consensus on Wednesday showing a 0.4% drop on the month and 3.3% annual rise against 1.7% m/m and 5.6% previously. Our economists note the importance of the volatility element in this report, although they argue that the trend in retail sales is weakening. Norges Bank increased its deposit rate to 5.50% in April and it will likely take a substantial decline in the inflation rate for the central bank to turn dovish. Our economists are looking for steady rates until the year end. We maintain our neutral EURNOK short term forecast targeting the pair at 7.95, but looking for the krone to strengthen to 7.80/euro over three months. Ahead Thursday, Norges Bank Governor Gjedrem will be speaking at 1215 GMT.