The comments from Federal Reserve Chairman Bernanke will be watched very closely on Wednesday and he is unlikely to provide a particularly upbeat assessment of the economy. Even if Bernanke looks to offer reassurance, the dollar is not in a good position to gain support from the US economic outlook or fundamentals. With the dollar not in a good position to gain much support, it will be dependent on Euro weakness to make much headway. There will be further uncertainty surrounding the European bank stress tests which is liable to lead to volatile trading conditions and hamper the Euro. Nevertheless, the Euro should find further support below 1.28 ahead of Bernanke's testimony.

The Euro spiked higher in European trading on Tuesday and pushed to fresh 10-week highs above 1.3020, helped in part by higher than expected German producer prices. The move above 1.30 was short-lived, however, and there was an initial retreat back to the 1.2930 area.

There was a weak Hungarian debt auction which tended to undermine Euro sentiment to some extent following the setback on IMF talks on Monday. There was some wider negative impact on the Euro with fears that there would be a contagion effect on weaker Euro-zone economies such as Greece and Spain.

The US housing starts data was weaker than expected with a 5% monthly decline to an annual rate of 0.55mn, but there was a monthly gain in permits which helped cushion the impact. There will still be unease over the US economic trends with persistent speculation that there will be a deterioration in conditions. In this context, the comments from US Federal Reserve Bernanke will be watched closely on Wednesday. There will be a further erosion of yield support if there are generally downbeat comments from the Fed chief.