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Yesterday saw the FX market take a pause as the Euro earned a brief respite from its sovereign debt doldrums, rebounding from Friday's lows of 1.3585; it appears to be starting to unwind some of its recent oversold momentum.

It also gained some support overnight from a report that European Central Bank President Trichet will leave a meeting in Sydney early to attend a European Union leaders' summit on Thursday.

This meeting of EU leaders is set to discuss the Economic roadmap of the euro zone for the next 10 years; however it is difficult to see how the problems of Greece and other vulnerable indebted nations won't overshadow the summit.
Especially so, now that the Greek trade unions have confirmed their 24-hour walk-out on Wednesday in protest over the government's austerity measures, while the Portuguese still want to hike spending. It would appear that these countries still don't get it, and this starkly highlights the problems ahead for the politicians as they seek to find a resolution to a problem that threatens to undermine the entire concept of the single currency.

If they decide to bailout Greece the other EU nations with debt problems will feel entitled to the same treatment, which given the combined size of the sovereign debts of these countries, especially Spain, would be ruinously expensive and disastrous for the Euro, and if they don't bail them out it will prompt a full blown crisis in any case.

The pound is also is the spotlight today as retail sales and housing data are expected to reinforce doubts about the strength of the economic recovery.
Bad weather and less aggressive discounting by retailers in January is seen limiting the like for like rise in retail sales last month to just 0.5%.
That's much less than the 4.2% growth the British Retail Consortium (BRC) reported for December. The year-on-year figure is seen up 3.3%, down from 6% the month before.

The pound is currently looking a little oversold against the dollar and with the release of the monthly inflation report tomorrow may gain some support from that on short covering, but it needs to recover back through its previous lows at 1.5705/10 to stabilise in the short term, otherwise the danger of further downside towards 1.5190 remains the risk.

However, with a number of commodity indices breaking down through their long term 200 day moving averages, and equity markets also looking vulnerable, the US dollar will continue to be the main beneficiary of the bigger story of sovereign debt uncertainty.

With continued hawkish remarks from Fed members like Bullard, who stated that he does not see further mortgage backed securities purchases beyond March, and talking about inflation spikes this recent dollar strength will continue to undermine the Euro, and while it may be vulnerable to the occasional pull back the long term direction of the Euro has switched to a test of 1.3485, and lower towards 1.3000.
Any pull backs could well be limited to the 1.3800/50 area which was the 50% retracement of last year's bull run from 1.2460 to the highs at 1.5145.

The only currency where you could see dollar losses is against the Japanese yen as investors go back to using the yen as a funding currency, however any pullbacks in the dollar index could well see the dollar gain against the yen in the short term towards 90.70.
However a return to risk aversion will continue to push the dollar back towards support around 88.25, which is 61.8% retracement of the up move from the lows at 84.80, to the highs at 93.75.

At some point traders need to be aware of possible Bank of Japan interest, but this won't happen until we see a move closer to 85.00.