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Ben Bernanke takes centre stage on Wednesday as the chairman of the US Federal Reserve starts his semi-annual testimony before the Senate in a hugely busy week for data releases on both sides of the Atlantic.

Mr Bernanke will reassure investors that inflationary pressures are moderating and the housing market is stabilising so the US economy remains on course for a soft landing. Updated Fed forecasts are expected to show core inflation continuing to decline through 2008 with economic growth slowing to 2.5 per cent to 3 per cent in 2007 before picking up again next year.

Against this backdrop, earlier expectations that the Fed will cut interest rates in the first half of 2007 have vanished. Capital Economics has raised its year-end forecast for US rates from 4 per cent to 4.5 per cent and expects them to remain at that level in 2008.

US trade data for December, due on Tuesday, are expected to show the deficit widen slightly from $58.2bn in November to $59.5bn. This would swell the full-year deficit to $761.1bn, an increase of 6.2 per cent on 2006.

In the UK inflation data due on Tuesday are expected to fall from 3 per cent in December to 2.9 per cent in January. Inflation is expected to decline sharply later this year but the key to the outlook for interest rates will be contained in the Bank of England’s February Inflation Report, due on Wednesday.

Policymakers attempt to assess inflationary pressures two years hence owing to the delays with which changes in monetary policy act on the economy. But money markets expect earlier action and are currently pricing in two further quarter-point rate increases before the year end.

This year’s pay round is seen as crucial for determining inflation expectations and the Bank wants to send a clear message to wage setters. Wednesday brings labour market data with the headline measure of earnings growth expected to remain unchanged at 4.1 per cent in December. But private sector services earnings rose 4.5 per cent before a vital month for settlements in January.

Unemployment is expected to remain unchanged at 5.5 per cent in December but there is concern that full-time employment has started to decline and this could have an impact on consumer spending in 2007.

UK retail sales for January, due on Thursday, are expected to rise by 0.2 per cent, which would swell the year-on-year growth rate from 3.7 per cent in December to 5.4 per cent. This would represent a surprisingly strong turnout for the Christmas shopping period after some mixed performances on the High Street.

Tuesday brings gross domestic product data for Italy, France, Germany and the eurozone with a strengthening in growth in the fourth quarter expected across the region. Eurozone year-on-year GDP growth is forecast to rise from 2.7 per cent in the third quarter to 3 per cent in the fourth, helped by a strong performance from Germany where growth is expected to increase from 2.8 per cent to 3.2 per cent.

Some of that strength was due to German consumers and businesses accelerating spending in advance of January’s VAT rise so the outlook for activity remains uncertain. But the expectations measure in the ZEW survey, due on Tuesday, has started to recover, suggesting any slowdown will be relatively modest.

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