The US dollar rose against the euro overnight following additional soft economic data in the Eurozone, supporting our stance that the ECB will be forced to cut rates before too long. EURUSD traded to a US session low 1.5366 from a high of 1.5443 and has subsequently traded below 1.5340 this morning. Dollar strength came despite falling US yields, with the 2-year Treasury yield down by 9bp, while 10-years fell by 7bp. On the data front, pending home sales fell by 1% m/m in March, in line with consensus, although February was revised down sharply to -2.8% m/m from -1.9% m/m. Non-farm business productivity for Q1 was released and accelerated in y/y terms, while unit labour costs slowed. Our economists note that the combination of rising productivity and slowing unit labour costs is unusual in a recession and should help to ease inflationary pressures. The OIS market is now pricing in 56.5bp of tightening over the next 12 months, down from 70bp yesterday and despite hawkish comments from Fed's Hoenig. Hoenig warned that inflation was too high and suggested that when the Fed is ready to raise rates, it may have do so relatively quickly. While Hoenig, a non-voter, is known for his relatively hawkish stance, it is the first time that we can recall a Fed official discussing the prospects of tightening. Despite the market already pricing in some prospect of the Fed tightening, we still think it's possible for the US dollar to rally further. As economic conditions in the US stagnate, US dollar valuations will become more a reflection of economic conditions elsewhere. As such, while in the past euro has traded as an 'anti-dollar', the US dollar may well become something of an 'anti-euro', at least while Eurozone economic conditions are in such a state of flux. We maintain our 3-month forecasts for EURUSD and USDJPY at 1.47 and 100 respectively.

Ahead today, the BoE and the ECB meet at 1100 GMT and 1145 GMT. In the US, jobless claims are due at 1230 GMT.

Eurozone retail sales for March declined by -0.4% m/m against expectations of a 0.2% m/m rise and were down 1.6% y/y. German industrial orders for March were also soft, falling by 0.6% m/m, below consensus of a gain of 0.3% m/m. The deterioration in data is perhaps coming in a bit faster than our economists expected, but nonetheless is consistent with their call for the ECB to cut rates by 100bp. The data is undermining EURUSD ahead of the ECB meeting later today. While no one expects the ECB to adjust rates, ECB President Trichet may want to acknowledge the deteriorating activity data in his subsequent press conference. However, high oil and commodity prices suggest that he will still need to maintain a hawkish tone. EURUSD has broken through our 1-month target of 1.55 but is still well off our 3-month target of 1.47. We suspect that there are still many asset managers with entrenched long EURUSD positions are at risk of being unwound, as EURUSD breaks pain thresholds on the downside.

The New Zealand dollar has fallen sharply this morning on the back of a very soft labour market report. Employment for Q1 shrunk by 1.3% q/q, disappointing market expectations of a decline of 0.1% q/q, while the unemployment rate rose to 3.6% from 3.4% in Q4. The decline in employment was the worst since the series began in 1989. The OIS market is now pricing in 11bp of easing at the June 5 meeting, 15.5bp of easing at the July 24 meeting and a cumulative 76bp by year-end. AUDNZD immediately spiked above 1.21 (currently trading around 1.2120) from 1.2050 levels, while NZDUSD fell below 0.7740. The data will likely bring forward the start of the RBNZ easing cycle, and in such an environment it is worth considering 'neutral' policy rate in the NZ context. RBNZ policy rates are currently at 8.25% and the RBNZ has in the past estimated neutral rates at around 6.25%. The usual textbook formula of long-term growth plus the mid-point of the inflation target would yield a result more like 5%, but for decades New Zealand has managed to run interest rates higher than what traditional analysis would suggest, likely due to the country's low saving rates. We continue to target AUDNZD at 1.21 over 3 months and 1.24 by year-end. However, any sign that the economy is slowing in a disorderly fashion will require us to shift our NZD forecasts lower. We had been worried about the one-sided nature of views on the NZD, but today's data appears to preclude any chance of a position disruption to the downside in the cross. As such we bring our 1-month AUDNZD forecast higher to 1.21 in line with our 3-month view and up from 1.18 previously.

UK March industrial production came in softer than expected dropping 0.5% m/m and rising a puny 0.2% y/y down from 0.3% m/m and 1.3% y/y last. March manufacturing production also surprised to the downside dropping 0.5% m/m and increasing 0.6% y/y. This was the largest monthly drop in manufacturing since September last year and is estimated to reduce the preliminary GDP rate by 0.02 ppt. Recent data releases have showed evidence of a sharp slowdown in the UK economy, weakening in consumer confidence and further housing jitters. However, higher food and energy prices will unlikely give respite to the MPC who will announce its interest rate decision later today. April BRC shop price index rose 1.2% y/y from 1.1% y/y previously. Details of recent manufacturing PMI survey showed input price index rising to its highest level since the records stared. Our economists along with consensus are looking for the rates to be kept on hold today, while the next cut will likely be delivered in June. With sequential rate cuts for both the BoE and the ECB on the horizon, both GBP and EUR will likely continue to trend lower against the dollar. Near-term risks however are for EURGBP downside as the ECB catches up with its deteriorating economic circumstances.

Riksbank minutes showed the central bank was united in its decision to keep rates unchanged at 4.25% on April 22. Underlying inflation rose 2.3% y/y in March from 2% previously, as food and energy prices globally continued to strengthen. However, as a counterbalancing effect weaker international economic activity is creating more uncertainty for economic developments domestically. The minutes suggested the repo rate will remain unchanged throughout the forecast period. Despite this our economists note the overall tone was slightly on the hawkish side. Oeberg argued there was a slighlty greater possibility of a rate increase during the year rather than a cut. Weighing risks to higher inflation suggest the Riksbank may remain on hold for longer. Nevertheless our economists believe that the central bank will have to cut rates this year as global weakness will have a greater impact on the Swedish economy than the Riksbank is currently expecting. The krona should continue to benefit from the central bank's optimistic stance. In our view market repricing of policy expectations in the Eurozone will help EURSEK to trend lower to our three month target of 9.25.