The US dollar was stable overnight as US CPI came in within expectations. EURUSD traded in a 1.5430 to 1.5487 range, while USDJPY traded between 104.79 and 105.37. Equity markets finished slightly higher, up 0.4%, while 2-year Treasury yields rose by 3bp. Overall CPI for April rose by +0.2% m/m, weaker than expectations of +0.3% m/m, while core CPI rose by just 0.1% m/m, tamer than consensus of +0.1% m/m. While CPI inflation was contained, Fed comments on monetary policy indicate some concern that rates are too low. Fed's Yellen said this morning on the wires that the Fed funds rate is low enough and her comments follow on from a plethora of comments officials on Tuesday that inflation is a clear risk. Former Fed chairman Volcker said that it is important to maintain confidence in the dollar, echoing similar comments by Fed Fisher on Tuesday. Current Fed Chairman Bernanke speaks today at 1330 GMT on the topic of "Risk Management at Banking Organisations" with a Q&A session afterwards. Bernanke has yet to articulate the degree of concern over the dollar and inflation that his colleagues and former colleagues have shown. Any, acknowledgement of those views by Bernanke will be positive for the currency. We think EURUSD can continue to trade lower and we forecast the pair at 1.50 over 1 month and 1.47 over 3 months. We remain short EURUSD as a trade recommendation from 1.5455, targeting 1.5010. Ahead today, and in addition to Bernanke's comments, jobless claims are due at 1230 GMT, followed by the NY Fed Empire State survey at 1230 GMT.

The May Inflation Report presented by the BoE Governor Mervyn King on Wednesday surprised on a hawkish rather than a neutral note. As a consequence, UK 2-year yields are up by 17bp on Wednesday's close and up by around 40bp since last Friday's close, helped also by Tuesday's strong CPI. The markets are now pricing in 4.5bp of rate cuts at the June 5 meeting, and 2.5bp of rate cuts at the July 10 meeting. In the report, the BoE said that it expected inflation to exceed 3% for "several quarters", but also highlighted downside risks to growth, forecast GDP growth just 1% by year-end. We think circumstances in the UK will force the GBP to cut rates this year despite the rhetoric and we maintain that GBPUSD should continue to trade lower. We target the pair at 1.92 over 1 month.

The main focus in the Eurozone today will be German GDP for Q1 at 0600 GMT, followed by Eurozone GDP at 0900 GMT. German newspaper FAZ reported that German growth could surprise to the upside, coming in a higher range of 0.8-0.9% q/q, instead of 0.7% as expected. The strength was likely driven by strong construction numbers, even while leading indicators is most parts of the Eurozone have been deteriorating. We think that the market is aware that the data could be strong and as such does not present much upside risks to EURUSD. We remain short EURUSD from 1.5455, targeting 1.5010.

New Zealand retail sales, released this morning, shocked the market with their weakness and further raised the risk that the economy is deteriorating in a disorderly fashion. March retail sales fell by 1.2% m/m, against expectations of a 0.4% m/m decline. The report follows on from the -0.6% m/m decline reported in February. Moreover, retail sales volumes for Q1 contracted 1.2% q/q against expectations of -0.2% q/q. So we know that in Q1 the housing market has come to a grinding halt, employment has fallen sharply and consumer spending has contracted. There is plenty of scope for a further tightening of belts by the household sector and we expect AUDNZD to trade higher, targeting 1.24 over 3 months with additional downside risks to NZD in that forecast.

Meanwhile, in Australia yesterday wages growth in Q1 was softer than expected, coming in at 0.9% q/q versus expectations of a 1.1% q/q gain. Our economists note that the wages data provides tentative evidence of some moderation in wage growth. To this extent, it certainly provides the opportunity - in conjunction with weaker demand data - for monetary policy to remain on hold for the time being to see how the outlook for growth (and inflation) unfolds. Vigilance remains with the RBA on price pressures and the central bank will likely stick to its neutral stance for now. We continue to target AUDUSD at 0.9400 over 1 month and 0.9100 over 3 months.

Swedish April CPI surprised the market to the upside as the inflation accelerated 2.4% y/y against 2.3% y/y in March. The headline and underlying inflation readings are both above Riksbank's forecasts, suggesting inflation has been increasing quicker than expected. Last week Riksbank's minutes surprised the market by a adopting a slightly more hawkish than expected tone. Also released on Tuesday, the April unemployment rate fell to 2.9% from 3.2%, suggesting further tightening in the labour market. Last week Deputy Governor Oeberg argued there was a greater chance of a rate hike than a cut this year in Sweden, as risks to higher inflation have grown. Higher inflation is against our economists' call that the central bank will cut the policy rate in Q3. However, they highlight that the growth data out of Sweden has been weakening recently and as such the underlying pressures on prices will subside allowing the Riksbank to ease policy rates. For now, concerns over higher inflation will keep market expectations of monetary policy optimistic, and the SEK supported. EURSEK should continue to move towards our three month target of 9.25.