The US dollar traded in a narrow range of 1.5189 and 1.5250 against the euro in New York, while USDJPY stayed in a 102.65-103.48 range. Gold lost more than 2% and oil prices dropped below $100 barrel, losing 4% in less than a day. This kept commodity currencies under pressure. USDCAD gained 0.8% from its lows, while the AUD (current spot 0.9278) recovered somewhat following losses earlier in the session. US stocks closed in slightly negative territory.

The dollar stays at risk amid potential further cyclical weakness ahead. Our economists look for more recession-like data, including ISM reports, a 50k decline in payrolls and an uptick in the unemployment rate to 5.1% in Friday's employment report. The OIS market is currently pricing in 68.5bp of easing at the March 18 FOMC meeting, while our economists forecast a 50bp cut to 2.50%. Downside risks in economic growth should lead to a lower dollar. Chart1 compares USDJPY to 2-year USD-JPY yield differentials. The two lines are falling in tandem which suggests recent USD weakness has been mainly cyclical in nature. Prospects of USDJPY falling and EURUSD rising further stay intact.

We believe it is unlikely that the ECB will follow the Fed's easing suit with Eurozone inflation still elevated. In addition, contrary to Eurozone officials now signaling displeasure with the strong euro, US officials have thus far welcomed a weaker dollar in the current environment. We are long EURUSD as a trade recommendation with a target of 1.56 and a stop loss at 1.5020.

Ahead on Wednesday, we expect the ADP Employment Report (Feb), Non-manufacturing ISM (Feb) and the Beige Book (also see calendar in the back).

EU commission and Eurogroup lawmakers fired more warnings regarding the euro's current levels on Tuesday. Eurogroup Chairman Juncker reiterated his belief that the Euro is overvalued compared to the dollar, yen and yuan. Belgium's representative at the ECB, Guy Quaden, said that US authorities, "who repeat that they are in favour of a strong dollar" should reaffirm their words. In addition, EU monetary affairs commissioner Almunia said Tuesday that financial market turmoil is "starting to spill over to the real economy," and that "the impact is starting to take a toll on growth figures." Given the ECB's mandate to ensure price stability and the Fed's willingness to see further improvement in export growth, the risk of unilateral or coordinated intervention to precipitate a EURUSD adjustment is low at this stage. Data so far have proven that Eurozone growth is resilient to a stronger EUR. Eurozone GDP growth, released Tuesday, was unrevised at 0.4%, but the y/y number was revised slightly lower from 2.3% to 2.2%. Our economists point to weak consumption as the source of the annual moderation, though net export contributed strongly to growth. Elsewhere on the data front, Eurozone PPI was in-line with expectations at 0.8% m/m. We and the consensus expect the ECB to leave rates on hold at 4.00% on Thursday. The OIS market is pricing in just 3bp of easing this week. Ahead Wednesday, the final reading of the Eurozone services and composite PMI surveys for February (UBSe 52.3/52.7, consensus 52.3/52.7, previous 52.3/52.7) will be released at 900 GMT. The Eurozone retail sales figure for January (UBSe -0.2%, consensus 0.3%, previous -0.1%) is due at 1000 GMT.

Swiss Q4 GDP growth surprised to the upside at 3.6% y/y, and the Q3 figure was revised up slightly from 2.9% to 3.0%. According to our economists, private consumption and service exports were the main contributors to the stronger than expected result. Overall, stronger than expected Q4 GDP growth will provide some comfort to those worried about downside risks to Swiss growth. The CPI for February was also released Tuesday and at 2.4% y/y, inflation was stable and in line with expectations. Nevertheless, we expect the SNB to remain focused on price stability. Our economists expect the SNB to leave rates on hold next week. Our EURCHF one- and three-month forecast is 1.58. We would view a rally as an opportunity to re-enter EURCHF shorts.

The manufacturing and construction surveys have shown mixed results ahead of the more important services PMI release, due Wednesday. The construction PMI survey, released Tuesday, declined from 53.9 in January to 52.4 in February, the lowest level since June 2006. The Bank of England's rate announcement on Thursday is the focus of the week. We and the consensus look for no change to rates as elevated inflation expectations remain the MPC's primary concern presently. Our economists continue to expect overall economic activity to decelerate further, and forecast another 100bp of easing from the BoE this year. The next rate cut is expected in May. EURGBP will likely stay elevated in the near term. Although we expect the ECB to keep rates unchanged on Thursday as well, should its rhetoric change to a more cautious stance, it may lead to potential downside in the pair. We continue to target EURGBP at 0.75 over one month and 0.74 over three months. Ahead Wednesday, the services PMI reading (UBSe 52.1, consensus 52.0, previous 52.5) is due at 930 GMT. The BRC shop price index for February will be released at 1030 GMT.

The Bank of Canada cut rates by 50bp to 3.50% on Tuesday and USDCAD traded higher on the release. The consensus had been split between 25bp and 50bp, and prior to the decision, the OIS market was pricing in 48bp for Tuesday's meeting. In the accompanying statement, the BoC noted that while economic growth and CPI have been consistent with central bank expectations, the US economy is likely to experience a deeper and more prolonged slowdown than projected in January. In addition, the BoC expects worsening US economic conditions to have spillover effects on the global economy, and believes downside risks to Canada's economic outlook are materializing and intensifying. With regard to price stability, the BoC believes risks to the inflation outlook have "clearly shifted to the downside." With the BoC stating that "further monetary stimulus is likely to be required in the near term," our economists maintain their forecast of rates reaching 3.00% by mid-year. Given the dovish statement, risks for more aggressive easing have risen. We forecast USDCAD at 0.97 in one month and 1.02 in three months.