EURUSD remained under pressure, trading in a 1.5664-1.5541 range, while USDJPY was kept within 103.23-104.09, unable to break lower, following the selloff during NY morning hours. At $871/oz, gold sold off by more than 2.3% on the day. Crude oil lost more than $4 ($115.5/bbl), unable to inspire stock markets which remained range bound. The S&P (-0.4%) and the Dow (-0.3%) ended the session in marginally negative territory.

European news remained downbeat with French consumer confidence dropping to -37 from -36. Spanish and Italian retail sector indices also plunged, reinforcing the scenario that the economies of Europe are succumbing to the spillover effects of the U.S. economic downturn. European weakness may also have been the reason behind declines in selected EM currencies. The BRL depreciated strongly on Tuesday, losing around 1.1% against the USD and closing at 1.7068. USDMXN also rose, however at 5.95, 1M vols stay low. Our EM strategists view USDMXN vols as one out of several early indicators for emerging market contagion (Chart 1).

In the US, data remains weak: The S&P/Case Shiller (S&P/CS) composite 20 home price index fell more than expected in February: -2.7%m/m/-12.7%y/y. The Conference Board consumer confidence index fell to 62.3 in April (cons: 61.0, UBSe: 60.0) from an upward revised 65.9 in March (was 64.5). The decline reflected more negative perceptions of the labor market. Note our economists are still calling for a 100k decline in payrolls and a 0.2 point rise to 5.3% in the unemployment rate in Friday's report; the consensus is calling for -75k/5.2%.

Looking ahead today, our economists are calling for a flat GDP Q1 release, mentioning inventories likely provided a modest boost to growth. FOMC: We and the consensus are looking for the Fed to cut rates by another 25bp to 2%. Officials likely will articulate their hope that actions to date, including liquidity boosting measures, as well as upcoming tax rebates, will be sufficient to stimulate a recovery in the economy by the second half of this year. We expect the reference to acting in a "timely matter" will be dropped-consistent with officials discouraging expectations for continued easing. We think that for now, stable US economic conditions will be enough for EURUSD heading towards our one- and three month target of 1.55 and 1.47 respectively.

The euro extended its falls on the back of a weak German provisional CPI print and weak French macro numbers. Initial CPI releases from individual states already pointed to a downside surprise in German CPI and the final release of 2.4%y/y was less than the 2.8% expected by markets and well below 3.1% from last month. ECB officials, such as Governing Council member Liebscher, have been quick to point out that one month's data is not a trend but we believe this number, in additional to last week's weak Ifo print, is further confirmation of slowing demand across the Eurozone. With commodity prices unlikely to extend recent gains, the ECB will acknowledge that having a strong EUR while growth is weakening and inflationary pressures are easing is not in the currency zone's best interest, though ist rhetoric remains soft compared to that of the European commission. In other data, French consumer confidence for April fell to -37, the lowest since the series began in 1987. The French quarterly survey of industry published by Insee noted competitiveness had declined in Q1 and the export outlook is in retreat. Our economists note that the results are in-line with our key scenario for the Eurozone of close-to-trend but slowing growth up ahead. Further declines in confidence will increase calls for monetary accommodation by the ECB and the central bank's language at its next policy meeting will come under greater scrutiny. Elsewhere, SNB's Jordan said yesterday that current rate levels look appropriate for the foreseeable future, but that high oil prices might prolong the phase of high inflation. However, he highlighted that he does not expect current levels in oil to be sustainable. Overall the latest commentary from SNB officials does not constitute a change in rhetoric, and supports the central bank's on-hold policy stance.

UK March mortgage approvals fell to 64k less than the consensus was forecasting at 66k and down from a downwardly revised 72k in February. Today's outcome marked the lowest reading since the series started in February 2002. Net lending secured on dwellings fell to GBP6.9 bn in March against expectations of GBP7.2 bn, while the February number was slightly revised downwards. We expect housing market to continue to surprise to the downside. In his testimony to the Parliament on his reappointment for the second term as BoE Governor Mervyn King reiterated the challenges the central bank is facing to keep the inflation rate on track. In March CPI remained steady at 2.5% on an annual basis, however the BoE expects the rate to reach 3% this year, its letter-writing territory. Our economists, however, believe the period of prolonged growth due to the ongoing financial crisis and slowing economy will help reduce inflation allowing the MPC to continue lowering rats. UK CBI retail survey released today showed retail sales index falling to -26 in April down from +1 in March, the lowest level since 2005. The expected retail sales component for May fell to -15, suggesting a downward trend in retail sales to hold. The survey showed retail orders index falling to -28 from -10 last, while sales volume dropped to -38 in April, its lowest level since November 1992. We maintain our moderately bearish view on the pound, but believe EURGBP downside is limited further ahead. Our EURGBP forecasts are 0.78 over 1m and 0.76 over 3m. In contrast, we target cable at 1.93 in 3m. Ahead today, MPC member David Blanchflower will be make a speech at 10:00 EDT. Blanchflower was the only voter on the MPC board who voted for a 50bp cut in the bank rate in April.

Swedish Q1 manufacturing confidence was constant at 3, revised upwards from 2 in the previous quarter and beating market expectations of the indictor falling to 0. While construction and services were down on the sector, overall manufacturing sentiment held up well rising to 5 from 0. However, consumer confidence remains weak having declined to 0.8 from 2.5, its almost five year low. Riksbank Governor Ingves speaking Monday reiterated the health of the Swedish financial system and still strong economic fundamentals. However, as credit crunch starts to bite the neighbouring economies, the spillover effects will undermine the Swedish economy likewise. Our economists continue to see below trend growth this year, and business activity indicators moderating, just as they have recently done in Europe. This should prompt the Riksbank to embark on easing path in H2, and put the SEK under pressure. For now, market reassessment of rate expectations in Europe should contribute to EURSEK trending lower, but in the longer term the krona will unlikely maintain such support. Our 1m and 3m EURSEK forecasts remain 9.35 and 9.25 respectively. In other releases, March retail sales rose more than expected 0.4% m/m and 3.9% y/y, up from 1.6% m/m and 4.5% y/y in February. Elsewhere, ahead on Wednesday, Norway March retail sales will be released at 0800 GMT (cons: 0.4%, last: 1.7%). We expect the unemployment rate to have remain unchanged in February at 2.3% due at 0800 GMT. Also today, Norges bank will release its foreign exchange purchases for the Government Pension Fund in May (last: NOK450mn).NZD, AUD: NZ trade balance disappoints.