It’s possible the Italian election will change everything back to fear and loathing of peripheral debt. Draghi doused that fire with “whatever it takes” and yields have been grinding steadily lower, but everyone knows that the real fix is going to take years, and confidence in the fix depends on keeping clowns like Berlusconi out of the picture. Monti was the best thing to happen to Italy and the voters should have the brains to elect him for real this time, or at least put him in the position to form a coalition. But remember the voters rejecting Churchill after the war.

The other big news--and hardly any less political--is Bernanke’s semi-annual testimony to Congress, starting with the Senate on Tuesday and the House the next day. He will be pressed hard to address the exit from QE, not least because a member has written a letter demanding he address the exit. According to Wall Street guru Lynne, Rep Jordan (R, Ohio) demanded documentation by March 5 on the research done by the Fed on how it will withdraw accommodation. The WSJ published the story Feb 19 but it has received little notice. We do not know whether the Fed is required to respond but it must weigh on Mr. Bernanke. After all, the Fed balance sheet is now $3 trillion.

But this week it is widely expected he will say as little as possible about plans for the exit and will instead point out that the Fed is stalled on any such plans because of the drag the sequester will place on the economy. In other words, no exit this year, and the stock market crowd will just love it.

This raises the issue of why the dollar is not being punished for dysfunction in Washington. At a guess, the markets approve of the US finally showing concern about over-indebtedness and will worry about growth tomorrow. A major cut like the sequester, badly formulated though it may be, is better than the usual American arrogance that “debt doesn’t matter” (as we used to hear from the Bush VP).

While the political stuff is going on, data this week includes GDP from a host of countries, including the US, Canada, Switzerland, Sweden and the U, plus German and eurozone inflation. We have a slew of Fed speakers, and today, the Chicago and Dallas Fed activity reports. Tomorrow it’s the Case-Shiller housing market report, the Richmond Fed and the Conference Board. Wednesday it’s Jan durables and pending home sales, and Thursday the second estimate of Q4 GDP, Chicago PMI, weekly jobless claims and a ton of European data. Friday brings the sequester, Feb manufacturing ISM, personal income and spending, Jan construction spending and the final University of Michigan consumer sentiment for Feb.

The safe bet (so far) is to expect trends in place to remain in place, meaning down with the euro, pound and yen, backed up by the occasional rhetorical spur from Tokyo and bad economic data from the eurozone. The sequester is just a silly sideshow in this context.

USD/JPY93.85LONG USDSTRONG10 /17/1278 .71 16.13%
GBP/USD1.5137SHORT GBPSTRONG01/18/13 1.59425.05%
EURO/USD1.3268SHORT EUROSTRONG 02/21/131.3184-0.64%
EURO/JPY124.54SHORT EUROWEAK02/22/13123.14-1.14%
EURO/GBP0.8765LONG EUROSTRONG11/26/120.80958.28%
GBP/JPY142.06SHORT GBPWEAK02/22/13131.020.22%
USD/CHF0.9255LONG USDSTRONG 02/21/130.9317-0.67%
USD/CAD1.0228LONG USDSTRONG01/24/130.99932.30%
AUD/USD1.0307SHORT AUDWEAK01/28/131.03920.82%
AUD/JPY96.73SHORT AUDWEAK02/22/1396.13-0.62%
USD/MXN12.6762LONG USDWEAK02/12/1312.7736-0.77%