The US dollar weakened slightly on the back of the FOMC minutes, but is still firmer against the euro and yen when compared with Asian levels yesterday. The yield curve steepened overnight, with the 2-year yield down 5bp to 1.87%, while the 10-year yield rose by 3bp to 3.57%, while equity markets finished lower. The FOMC minutes were negative for the US dollar as members indicated that a severe downturn could not be ruled out. On the inflation front, members noted that prices had been elevated recently due to oil prices, but some suggested that slowing demand should help to ease inflation. In other developments, pending home sales fell by 1.9% m/m in February, after a 0.3% m/m rise in January. The weaker-than-expected report casts some doubt on recent signs of stabilization in sales, which our economists believe is being impacted by a softening labour market, tighter lending standards and further home price declines. The BoJ concludes it's two-day board meeting today, while the ECB and the BoE meet tomorrow. Both the BoJ and the ECB will likely keep rates on hold, while we expect the BoE to cut rates - a view supported by softer UK Nationwide consumer confidence this morning. Although the FOMC minutes were negative for the US dollar, downside is limited. The direction of EURUSD may be in limbo until the ECB downgrades its hawkish stance - hence Trichet's comments tomorrow following the ECB decision will be important. However, it's probably still too early for the ECB to adjust its stance. Ultimately EURUSD will likely trade lower, and we target the pair at 1.55 over 1 month and 1.47 over 3 months.

Ahead today, a number of Fed officials are scheduled to speak. Governor Bernanke speaks at 1330 GMT, Korszner testifies to a House Financial Services Committee at 1400 GMT and Dallas speaks at 1740 GMT.

Eurogroup's Juncker has added his weight to the ECB's verbal campaign against inflationary wage increases, noting that any rise should be compatible with productivity gains and said second round inflation effects are unwanted. He said the recent wage deals made in Germany should not be taken as an example and called for moderation. His language ahead of the G7 was unchanged, expressing support for the US' statements on a strong dollar policy and said excessive volatility was unwelcome. Recent salary agreements in Germany have opened the door to second-round inflation effects and Trichet noted that the ECB is against wage indexation to CPI, and recommends wage moderation "without exception". We expect the same message will be sent clearly at Thursday's meeting, leaving the Eurozone further lagging in terms of policy moderation to counteract the global slowdown and the effects of the credit crisis on financial markets. As such, the EUR will likely come under pressure ahead as markets shift towards cyclically-driven positions.

The Japanese government's candidate for the BoJ governorship, Massaki Shirakawa spoke at his parliamentary hearing on his nomination yesterday. He did not display a specific policy preference and said it was important for the BoJ to analyse the economy and relevant risks "without having any preconceptions". The BoJ's policy positions have been overshadowed by the leadership vacuum but the market believes a dovish bias will be needed up ahead in light of challenging growth conditions. Shirakawa's stance would probably satisfy lawmakers who seek the central bank to support growth, but he also noted that the bank's independence would be maintained should he be confirmed. After the hearing the DPJ stated that consensus is willing to accept Shirakawa's nomination, indicating an end may be near to the leadership vacuum which has plagued Japan since mid-March. Vice-governor nominee Watanabe chose to stress current economic risks and warned that the country is slowing along with the US economy. He also said that intervention to smooth volatile foreign exchange markets can be justified. This is a surprising comment given that in the three years from June 2004 to June 2007 that Watanabe was in charge of FX policy for Japan, the authorities refrained from intervening. Watanabe's confirmation remains uncertain given the opposition DPJ party have already vetoed two other ex MOF candidates for the post. Moreover his successor at the MOF, Shinohara, has so far been cautious in arguing for intervention. We still think G7 won't result in anything meaningful and with carry appetite returning, USDJPY should stay supported anyway for now.

Halifax reported yesterday that the house price inflation dropped 2.5% in March, while house prices rose only 1.1% on an annual basis against the estimated 2.4% rise. The annual fall in Halifax house prices is the largest drop since September 1992 and is consistent with similar surveys measuring house price inflation: Nationwide's measure of house prices showed a drop in each of past five months. Housing slump concerns will intensify as the credit crunch continues to weaken the economy. Today, a UK mortgage lender announced it is to withdraw 100% mortgage offering as the bank continues facing higher funding costs, the last of major UK lenders to do so. On Thursday the BoE will decide whether to reduce its bank rate. While the current financial market environment suggests a more aggressive half point rate cut may be needed to counteract further housing market fallout, expectations of higher inflation concerns should limit the move to 25bp. The pound slipped across the board this morning. However we remain cautious of further downside in the GBP as the majority of bad news has been already priced in by the market. Our 1m and 3m EURGBP targets remain at 0.78 and 0.76 respectively.

RBNZ Governor Bollard spoke this morning and as we expected, played down prospects for a rate cut anytime soon. He said that the underlying economy remains strong and warned business not to 'hibernate' because of market turmoil. The latest data has been consistent with the RBNZ cutting rates by year-end, however, with yesterday's NBNZ business survey showing a sharp deterioration in business conditions in Q1. The RBNZ has been burnt before by a surprisingly strong NZ economy and as such, is likely to wait for a more material weakening in spending, employment and investment data before cutting rates. Retail sales for February on April 14 is the next key data release, and until then the NZD is unlikely to move decisively.

In Australia yesterday, business conditions and confidence for March as captured by the NAB survey deteriorated further. Business conditions are now at their lowest level since February 2002 although inflation pressures in the survey increased, driven by higher oil prices and the drought. Our economists note that the survey firmly suggests that the economy is on a slowing trajectory and risks to the growth outlook are firmly to the downside. With vols at their lowest levels since February, and data deteriorating in both Australia and New Zealand, investors could consider being long either AUD, or NZD 3-month puts/USD calls.