It is a fairly light economic data calendar today so all eyes will be on Federal Reserve Governor Ben Bernanke's testimony to the House Budget Committee at 1500 GMT/ 1000 ET. He is expected to stick closely to the same script he used at a speech last week to the National Press Association in Washington, where he reiterated his commitment to the second round of quantitative easing and acknowledged the pick-up in economic data while the labour market remains sluggish. Bernanke is likely to be grilled by the Committee on the weak job creation, and his thoughts on why payrolls have been fairly lacklustre (even taking account of the snow-disrupted data in December) will be interesting for the markets.

Yesterday three Fed speakers - Fisher, Lacker and Lockhart - were fairly hawkish. Fisher, who is the only voting Fed member for this year, said he supported this round of QE but would not support another round at this stage. Lacker, who will not be a voting member until 2012, said that he thinks that core inflation, which is at record lows in the US, could be bottoming out, while headline inflation pressures might become an issue. This is an interesting development since usually the Fed only looks at core inflation. If there is greater emphasis on headline inflation - which includes food and energy - then we could see the tone of the inflation debate in the US shift as commodities prices continue to rise.

Stocks are fairly flat and seem to have shrugged off China's rate hike yesterday. While this surprised the market, it was not altogether unexpected. Beijing has committed to tightening policy to dampen inflation, but only in very small increments, thus we should expect more hikes. At this stage interest rates are still negative in China, so the latest hike doesn't threaten the outlook for the growth. This has helped the Aussie dollar sustain gains above 1.0100 versus the US dollar.

The markets are fairly range-bound in the lead- up to Bernanke's testimony. In recent days we have seen the Swiss franc and Japanese yen sell off sharply against the greenback. These are the most interest-rate sensitive of the dollar currency pairs, and as long as Treasury yields keep moving higher then USDJPY and USDCHF should remain on the back-foot. Tomorrow's Swiss consumer price data could lend support to the decline in the Swissie. Prices are expected to have fallen 0.2 per cent last month, with the annual rate of core inflation at 0.6 per cent. Weak inflation pressures have reduced the chances of a rate hike by the Swiss Central Bank, which is weighing on the Alpine currency.

Data highlights earlier today included German and UK Trade data. In Germany the trade surplus was fairly in line with expectations in December at EUR11.9bn. Exports rose by less than expected at 0.5 per cent, but imports fell by 2.3 per cent, possibly on the back of the bad weather at the end of last year. The UK's trade deficit was notable because it reached a record in 2010. The total trade deficit widened to GBP-9.247bn, from GBP-8.466bn in November. A large increase in the number of foreign aircraft orders at the end of last year prior to January's increase in the sales tax weighed on the deficit more than normal, however there is no denying that the UK's economic rebalancing towards exports has yet to take hold. Even with the decline in sterling in recent years, rising commodity prices have weighed on the deficit. This is likely to worry the Bank of England, who meets tomorrow. There is growing pressure on the Bank to raise interest rates due to elevated levels of inflation, and in the minutes of the Bank's January meeting the MPC noted the impact of imported inflation. This data only reinforces the problem of the UK importing stronger inflation. However, there is also a risk that the deterioration in the UK's trade balance could cause Q4 GDP to be revised down from the -0.5 per cent initial reading. Who would want to set policy at the MPC these days?

The pound was relatively unchanged after the data and GBPUSD is still stuck in a 40 point range. More important for the outlook for the pound will be Bernanke's testimony and then tomorrow's MPC meeting, two big events that could move sterling before the end of the week.

Overall, FX markets are waiting for drivers and likely to trade in tight ranges until some event or data release sparks a directional move.

Data watch:


1500 GMT/ 1000 ET Fed Governor Bernanke testifies at the House Budget Committee

2245 GMT/ 1745 ET New York Fed's Sack to talk about QE2 in Philadelphia

2345 GMT/ 1845 ET Fed's Lockhart speaks on US economic outlook in Atlanta

02.00 GMT/ 2100 ET CN Chinese Exports Last 17.9 Exp 24.2

02.00 GMT/ 2100 ET CN Chinese Imports Last 25.6 Exp 24.3

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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