FOREX EUROPE UPDATE - USD

The dollar is lower amid a quiet session overnight, trading in a 1.2955-1.2970 range against the EUR and a 121.34-121.96 range against the JPY.

With the G7 out of the way and policymakers seemingly moving on to other topics, the market will retain its focus on key data releases scheduled this week. Carry trades enjoyed a brief surge yesterday but ended the session on the back foot. Despite passing a major risk hurdle and having calm restored to markets, investors have become more cautious as global monetary policy stances may yet surprise.

The Fed is still waiting for economic trends to become clear, and should Q4 GDP see sharp downward revisions as expected, coupled with weak CPI, Fed easing will firmly re-enter radar screens. Trade and inventory data this week will have a strong bearing on Q4 revised GDP and soft numbers would expose the USD to further weakness.

The ECB on the other hand has shrugged off blips in recent data, and in addition to usual warnings of price risks, new themes such as wage pressures have entered the central bank's purview. Higher yields have kept the dollar supported since the New Year, but we believe this will be hard to sustain once the effects of the US winter bounce begin to fade and the market begins to price in more Fed easing.

The major event in the US this week is Fed Chairman Bernanke's Congressional testimony on Wednesday and Thursday. With the market currently quite content with their assessment of Fed expectations, currency vols are quite low heading into the release, and it is more likely that economic data this week provides the impetus for fresh moves.

This week we would recommend watching retail sales for January in particular since the weather began to turn cold again in the latter half of the month (although temperatures were still higher than average for the month). The market's projecting a gain of just 0.3% m/m, down from 0.9% m/m in December.

Ahead today, the trade balance for December (13:30GMT) is expected to show an increase in the deficit to USD -60 bn (prev. -58.2 bn, cons. -59.6 bn) on the back of higher oil imports.