An extremely quiet calendar in Asia and Europe has led to a very tight trading range in euro and the yen. The EUR/USD has essentially bounced between 1.2050-1.2070 for most of today's trade as currency players positioned themselves for US Trade Balance data due Thursday at 13:30 GMT. Though the number is expected to generate a greater than -$60 Billion deficit, most analysts anticipate a slight narrowing to -$66 Billion from last months' record gap of -$68 Billion. The pair has stalled at these levels on the belief that the small contraction in the deficit will be beneficial for the greenback but we find it hard to fathom that the market will be able to spin an annual run rate in the US trade deficit of more  than three quarters of a trillion dollars as a dollar bullish fact.

Additionally, with each new day in 2006 it is becoming more evident that the growth rate differentials between EZ and US which widened out to more than 300 basis points in 2005 (with EZ GDP at 1.6% and US GDP at 4.3%) are very likely to compress as European growth perks up while US growth cools. Yesterday Treasury Secretary John Snow projected 3.5% growth rate for the US in 2006, but if housing which has been responsible for more that 50% of US GDP growth over the past few years slows markedly, US growth may become even more muted than Mr. Snow's forecast. On the other hand the German DIHK chambers of industry and commerce said today that German growth is picking up and could reach 1.8% or even 2% this year spurred by a more competitive export sector. As growth differentials and in turn interest rate differentials between EU and US begin to converge the EUR/USD should see a concomitant rise in value. As long as the pair holds the important 1.2000 level the near term advantage appears to be to the euro longs.

While the euro and yen treaded water, the real drama of the night was in the pound which saw a collapse of more than 100 points from yesterday's New York close on the back of shockingly wide Visible Trade Balance deficit which increased  to -£5966M from -£5000M projected as imports to non-EU nation skyrocketed. With UK now facing fiscal deficits of greater than 3% GDP and possible Trade  Deficits  of more than -£70 Billion per year, the country's financial condition is quickly deteriorating and should the situation exacerbate the pound may be the underperformer of 2006.

Boris Schlossberg is a Senior Currency Strategist at FXCM.