When I turn on smoothing for the camera the characters jitters horizontally. Though the camera moves smooth and the level/enemies appear crisp and as expected. The character looks like a box vibrating horizontally left and right very quickly when the camera is moving with smoothing on. Turning it off works as expected. Any idea what is causing this?
Have you set the camera's Process Mode to Physics? If not, the character will move on physics frames, and the camera on regular process frames, which aren't computed at the same time, which can be a cause for that jitter. That's the only thing I can think of right now.