Dollar and yen retreats mildly as Asian stocks and commodities recover from yesterday's sharp selloff. Sterling is so far the biggest loser this week on concern of deepening deflationary pressure in UK and much focus will be paid to today's CPI release. Swissy was relatively supported on safe haven buying and managed to climb against Euro and Sterling. Nevertheless, the strength of the pull back in dollar and yen is not strong enough to alter the near term bullish trend. Also, consider that DOW's sharp fall yesterday is solidifying the case that it has topped out after hitting 9422 key fibonacci resistance, we'd expect more upside in dollar and yen in near term at least.

Main focus in European session will be on UK inflation data. Headline CPI should have eased further to +1.5% yoy in July from +1.8% a month ago. Slowdown down in energy and food inflation will continue to exert downward pressure on inflation in the third quarter. Core inflation is expected to remain resilient and rose to +1.7% during the month from +1.6% in June. While staying in negative territory, RPI probably improved to -1.5% yoy in July from -1.6% in the prior month as driven by high housing prices. Any downside surprise will prompt speculations that BoE might expand the quantitative easing program again later this year and will pressure sterling. German ZEW economic sentiment is expected to improve to 45 in August while Eurozone ZEW is expected to improve to 43.

In US session, PPI is expected to drop -0.2% mom and -5.8% yoy in July. Core PPI is expected to rise slightly by 0.1% mom, 2.8% yoy . Housing starts probably rose to 598K in July from 582K in the previous month. In recent months, improvement in US housing starts was mainly driven by growth in single-family housing starts which is expected to have risen further in July. At the same time, multi-family starts should also have shown modest gain in July, following a drop of -27% mom in June. In June, building permits rose +9.6% mom to 570K and was driven by improvement in all regions. We expect the reading should have recorded further gains, to 573K, in July.

Dollar index retreats mildly after rising to 79.51 and some consolidation might be seen. But after all, pull back should be contained above 78.23 support and bring rally resumption to 100% projection of 77.43 to 79.39 from 78.23 at 80.19 next. Also, note that the current development is so far inline with the view that fall from March's high of 89.69 has completed with five waves down to 77.43 already. 81.47 will be the key resistance level for confirmation after taking out 79.66.