The US dollar strengthened across the board last week, with the euro in particular suffering some heavy losses. The US dollar benefited from the Fed adopting a more neutral stance at the FOMC last week, while data in the Eurozone continued to come in soft. On Friday, the dollar was supported by the non-farm payrolls release showing job losses of just 20k, while the jobless rate declined unexpectedly. The payrolls report is an exceptionally volatile release and subject to considerable revisions and hence we would not place too much emphasis on the one data point. In the week ahead, US data of particular interest is limited to non-manufacturing ISM for April due later today and pending home sales for March due on Wednesday. Non-manufacturing ISM likely only dipped to 49 in April from 49.6 in March, and is still only at levels consistent with a mild recession.

The bigger picture for FX markets remains that we think the ECB is being gradually forced by the data flow into accepting that interest rates need to come lower, while the Fed rate-cutting cycle is in its end game. On that basis, while the US dollar has already appreciated rather rapidly against EUR over the past one-and-a-half weeks, we think the risks still tilt to further strength, and target EURUSD at 1.47 over 3 months. We suspect that there is still significant positioning by real money accounts against the US dollar, and a recapitulation of those positions could become another driver of US dollar strength. On a shorter-term basis, our technical strategists warn that EURUSD remains bearish below 1.5499, and a break of 1.5410 opens the way down to 1.5342.

Ahead today, and in addition to the non-manufacturing ISM release at 1400 GMT, Fed Chairman Bernanke speaks on the subject of mortgage delinquencies in the US evening, or around 0030 GMT, which is tomorrow morning Asia time. Japan is on holiday today and tomorrow. The UK is also on holiday today.

The ECB meets on Thursday and while noone expects a rate move, there will be intense scrutiny of ECB President Trichet's subsequent press conference. Eurozone manufacturing PMI released on Friday showed a slight expansion in April but the pace was the lowest since May 2005. The headline figure of 50.7 shows the sector is flirting with contraction as the global downturn and weakening terms of trade continue to squeeze the sector. A breakdown showed that German and French manufacturing PMIs managed to say in expansionary territory, while Italian and Spanish PMIs remained well below 50 at 48.2 and 45.2 respectively.

A few data points are out this morning. A monthly barometer of inflation is due at 0030 GMT, while ANZ job ads and Q1 house prices are due at 0130 GMT. Employment data is key at present given the deterioration in consumer sentiment. The RBA meet tomorrow - we would expect them to maintain a neutral to slightly hawkish bias in light of strong PPI, CPI and Friday's unexpected rise in retail sales. However, even with the 0.5% m/m rise in retail sales for April, our economists note that following a flat January and a 0.1% drop in February, the first quarter of 2008 is the weakest since mid-2005. Volumes have fallen through the quarter, and overall the release is consistent with our expectations of a significant but orderly moderation in consumption over the coming year. With commodities prices starting to ease and the impact of the global slowdown being felt more widely, the AUD may face some pressures up ahead, though the current risk environment is proving more supportive for high-yielding currencies. While we think AUD can trade lower in coming months, we still need an appropriate catalyst. We maintain our 1- and 3-month targets for AUDUSD at 0.9100. In New Zealand this morning, the private sector labour cost index of private wages rose by 0.7% q/q, below expectations of a 0.8% q/q gain. However, the market is already short NZD, so the data had little impact.