Another quiet night in the European session as both the yen and the euro traded in very tight ranges against the buck. The economic data from the Eurozone did little to help tip price action either way as almost all of the components reported in line. German CPI printed at 2.1% just slightly higher than ECB's 2% target but still suggestive of a very tame inflationary regime. In Japan the small drop in consumer confidence may not bode well for yen longs. The survey dipped to 46.7 from 48.2 the month prior.  December's drop was the first decline in three months, but Japanese consumer confidence numbers are notoriously fickle, oscillating between 44 and 49 for the past two years. Nevertheless if the data registers another soft reading next month it would signal that Japanese domestic demand remains weak, most likely forcing the BOJ  to delay any monetary tightening measures.

Meanwhile the true action of the night was in the pound which fell more than half a cent on the back of tepid UK inflation data. With UK Core CPI printing at 1.3%  on a year over year basis the BOE has no ammunition to make a hawkish case against inflation and the pressure of the MPC from cable doves looking to loosen monetary policy could make lower UK rates a distinct possibility in the near future. As a result, the pound dropped to within a few points of the 1.7600 figure as speculative accounts bet on further interest convergence with the greenback.

In general it appears as though the currency market is awaiting US economic data this week before making any directional moves. Wednesday TICS report may set the tone for the rest of the week. If the number prints above $80 Billion * far in excess of the -$65 Billion US Trade deficit, dollar bulls could regain momentum. However, if there is marked contraction in foreign capital inflows, dollar longs could be very vulnerable to a sell off as all the old fears regarding US Balance sheet position will flood the market once again.

Boris Schlossberg is a Senior Currency Strategist at FXCM.