Risk aversion remains the main theme across the money markets this week with equity market continuing to slide and the safe havens of the US Dollar and Japanese Yen performing strongly. Very positive German GDP yesterday gave the euro a boost in early trading but again developments in Greece have swamped any positive euro related news and driven the euro lower against the Dollar and Sterling.

News of large euro outflows out of Greece by citizens is not helping the nagging feeling that a Greek exit from the eurozone is approaching faster than European politicians would like.

They have desperately tried to manage the situation to ensure that if the worst did happen, Greece leaving could be orderly.

The fear is now that politicians no longer have the ability to manage the situation and a disorderly exit may now be on the cards.

The Bank of England inflation report is due today at 10.30.

We have covered what the Governor is likely to outline, namely lower that expected growth and higher than expected inflation.

The market has already built that into Sterling and the news will probably play second fiddle to news coming from the eurozone for the rest of the week.

Developments in France, Greece and Spain continue to weigh on euro sentiment, driving the single currency lower across the board. Investors continue to be risk adverse as European voters take their toll on austerity loving- politicians.

The Spanish government has part-nationalised stricken lender Bankia, taking a 45 per cent stake in exchange for €4.5 billion in emergency loans and we can expect this to be the first of several injections of capital by the Spanish authorities into their struggling banking sector.

The search for a Greek government also looks set to drag on, after the second placed Syriza party in the recent elections failed to form a coalition.

The mandate now looks set to pass to the third placed Socialists in a ludicrous game of pass the parcel, with every failure racheting up the pressure to find a solution.

Much needed bail-out funds are being withheld until a government is in place, but with no end in sight to the election merry-go-round, EU officials need to act quickly to avoid making the situation worse than it already is.

This morning is an important one for Sterling with Industrial Production data due along with the Bank of England announcement on interest rates and the asset purchase scheme at midday.

The IP number for March is expected to show further declines in output but a number to the upside is a possibility after the rebound in construction in the last two months.

As we’ve mentioned before this week, it would be a huge surprise if the Bank of England made any changes to rates or QE.

Australian employment came in much better than expected, 4.9% against expectations of 5.3% catching the markets completely on the wrong side.

The AUD is off around 4% against the USD and GBP over the last few weeks after the central bank cut interest rates and looks set to cut further this year.

The market was quite short the Aussie, and the buying back of those positions has forced a quick 50 point rally overnight.

Mervyn King has lived up to his nickname as “Merve the Swerve” as he rejected criticism for the financial credit crunch crisis.  He blamed the banks, the system and the decision to de-regulate power from the Bank of England in the past.

Mervyn King went on to talk about the challenges facing the banking infrastructure going forward with a need for regulation, resolution and restructure which will be demonstrated next year when the BoE’s new financial policy committee will have the power to regulate banks.

King supported the idea of ring fencing high street bank operations so they have their own financial cushion to avoid failure and noted the necessity for a framework to allow a bank to fail without being nationalised.

Over to the markets and UK PMI services data has just come out significantly worse than expectations with a fall to 53.3 from 55.30 in March, however UK service expectations improved.

UK Nationwide House Price data also came in weaker than expected.  Nationwide expect house prices to be flat or moderately lower over the next 12 months.

The Pound is relatively unchanged on the data.

A key event today is the ECB meeting, it is widely expected that rates will remain on hold but there is an outside chance of a rate cut.

The key focal point will once again be the press conference following the meeting where Mario Draghi will face key questions on the outlook for Europe.

Recently we have been hearing calls for a clearer strategy on how to tackle slumping growth in the eurozone and what role the ECB can play in assisting the system.

In a surprise move over night the Reserve Bank of Australia (RBA) has slashed interest rates after concerns over their own economic forecasts. The widely expected move was for a 0.25% cut, however the key rate moved from 4.25% to 3.75%.

This is the first acknowledgment by the RBA that Australia is beginning to be affected by the global slowdown, particular in China.

“This decision is based on information received over the past few months that suggests that economic conditions have been somewhat weaker than expected, while inflation has moderated” according to the RBA.

As you would expect the AUS Dollar has been heavily sold off since the announcement and currently trades at 1.5720 against Sterling, from 1.5564 before the decision.

In other news Spain followed the UK yesterday by confirming they were in a technical recession following negative growth in the first quarter of the year.

This data coupled with poor Greek retail sales falling by 13% and a 0.3% negative growth figure weighed heavily on the single European currency yesterday pushing Sterling higher.

These gains have been given back this morning following UK PMI data which has fallen to a reading of 50.5 following a reading of 51.9 in March and below expectations of 51.5.

The sharp fall is the lowest since Christmas and has been largely attributed to low demand from the eurozone which has hit manufacturing and meant UK exports fell to levels not seen since May 2009.

Consequently Sterling now sits at 1.2213 against the single European currency and Cable at 1.6205.

Fears in Europe have escalated a notch amid growing concern on both economic data and political cohesion.  This morning S&P have taken a negative rating action on 16 Spanish banks, in addition press reports out of Germany suggest that a Merkel-Hollande alliance will not be as straightforward as the Merkozy alliance.

At the moment the euro is holding up fairly well as the market has been selling the US Dollar on sentiment that the Federal Reserve will ease further, however the underlying negative tone will be a concern to the markets.

Later this week the ECB are expected to leave interest rates on hold, however Mario Draghi will face tough questions in the press conference on the strategy for Europe amid growing concerns for a growth compact.

USA jobs data will be a main data point to watch this week.

Friday’s non-farm payroll report will form important sentiment for the pace of the US recovery after last month’s disappointing number which followed a good run of jobs data.

The number is expected to be a good number and the feedback on this data will be a key factor for the Feds future strategy-a bad number and we can expect more easing.

In the UK, attention will focus on the PMI data tomorrow and Thursday which will offer a snippet of growth feedback following last week’s preliminary Q1 GDP which came in negative.

Again if data proves negative it could trip the Bank of England to pump more QE through the system- possibly at the May MPC meeting.

The International Monetary Fund’s (IMF) has raised an additional £268 billion ($430 billion) for the pot meaning another set of support for the eurozone when it will be required.However, several other uncertainties persist to bother markets signifying that any rally could be short lived.

There is plenty of data and events this week including central bank decisions in the US, Japan and New Zealand.

In addition, US corporate earnings will stay under the spot light while bond auctions in the eurozone will also provide market drive.

It is doubtful that the Fed meeting tomorrow and Wednesday will incite any change in the currently low FX volatility atmosphere given that strategy settings will stay unchanged, with the bulk of FOMC members likely to look for the first alterations at the earliest in 2014.

The Fed as a result is unlikely to stir the Greenback out of its daze and if anything a fall in durable goods orders, little change in new home sales and a pull back in consumer confidence will play in support to Dollar bears over the coming week.

Even a relatively firm reading for Q1 GDP will be seen as backward looking given the slowing expected in Q2.

Over to Europe and the single European currency will have to compete with political proceedings as it absorbs the outcome of the initial round of the French presidential elections.

The reality is that the political course will carry on to a second round on 6 May which will act as a limit on the euro.

A variety of ‘flash’ purchasing managers indices (PMI) readings and economic opinion gauges will present some primary direction for the Euro but mostly stable to softer readings suggest little stimulation.

As a result euro/ US Dollar will largely remain within its recent range although news from Spain and Italy and their debt markets will have the potential to bring into play larger moves against the euro.

The UK has offered just under £10 billion in loans to the International Monetary Fund (IMF) to help economies in trouble.It is part of a global effort to bolster the fund’s lending capacity, which IMF managing director Christine Lagarde wanted to increase by £250 billion ($400 billion).

The UK is not alone in funding the lifeboat. Japan will contribute $60 billion, Australia $7 billion, Singapore $4 billion and the Republic of Korea $15 billion.

The IMF had already received commitments of $320 billion.

Finance ministers from the G20 group of leading economies discussed boosting the IMF’s resources at a meeting in Washington.

Mr Osborne said the loan was important to the UK: “It’s in Britain’s interest that we have a stable and strong world economy – that creates jobs in Britain.”

He added that any loan made would bring in a return in the form of interest.

He can lend up to £10 billion without parliamentary approval because Parliament has previously approved £40 billion of loans, of which only £30 billion has so far been committed.

But this latest pledge is unpopular with some members of Mr Osborne’s Conservative Party, who had been urging him not to sign up to an increase.

Backbench MP Peter Bone described the decision as “bonkers”, describing any efforts to prop up the eurozone as a waste of time.

The UK Independence Party leader, Nigel Farage, said: “[Mr] Osborne must tell the IMF that he will not donate one more penny piece to the failed euro bailouts.”

The Treasury says its contribution to the IMF is not public spending. All UK loans to the IMF are financed from the UK’s Official Reserves, remain UK assets and do not contribute to public sector net debt.

The IMF hopes that if private investors think that countries in trouble can be rescued if necessary, they will be more willing to lend to them and any funding problems will not escalate.

It has already warned that the eurozone’s debt crisis poses the biggest threat to the global economy, and warnings about Europe are expected to top the eventual communique from the meetings.

The cost of borrowing for Spain has jumped above 6%- increasing fears of a bailout.The yield on Spain’s 10 year bonds reached 6.1%, ahead of auctions of debt on Tuesday and Thursday that could be increasingly expensive for Spain.

Investors have been worried by data showing Spain’s banks are entirely dependent on emergency ECB loans.

In comparison, the yield on 10 year bonds from Germany- the eurozone’s strongest economy, is only 1.73%.

Spain is suffering from a deep economic slump brought about by a bust in its property and construction markets and over spending by the autonomous regions on health and education.

The rise in Spanish bond yields adds to the evidence of storms returning to the eurozone.

Interest rates of over 6% are not affordable if sustained indefinitely, though Spain is still below the 7% threshold that has sometimes been seen as triggering the need for a bailout.

There are also worries that the government might face a large bill to prop up the country’s banks, which made heavy losses on loans to property buyers.

The Bank of Spain said recently that the county’s economy contracted in the first quarter of the year – but it did not say by how much. The economy shrank by 0.3% in the three months to December, so this additional contraction implies that Spain’s economy is in recession.

On Friday, the Bank of Spain – the central bank – said its net lending to its banks in March had risen to 228 billion euros (£188 billion), up from “only” 152 billion euros a month earlier.

The big jump was mainly due to a second auction of three year emergency loans carried out by the European Central Bank, which has given 1 trillion euros to banks since December.

This money was intended to be lent by the ECB to national central banks, which is turn lent to commercial banks who would buy their country’s debts and bring borrowing costs down.

But these loans are creating their own financial headaches- as Spanish banks are now sitting on rising loses as spanish government debts fall.

Italian borrowing costs soared yesterday following new concerns about their ability to reduce its high levels of debt. In the latest auction the Italian government paid an interest rate of 3.89%- up from 2.76% last month and this has been against the recent trends but investors are becoming increasingly sceptical over Italy’s and Spain’s ability to reach deficit targets.

As a result newly elected governments in both countries have announced austerity measures to reach strict debt reduction targets.

Coupled with these figures, Greece published its latest unemployment data yesterday indicating a further rise with the overall rate pushed to 21.8% up from 14.8% at the same point last year.

Despite the bad news the euro remains towards to the higher of its recent trading range against the US Dollar currently trading in the high 1.31s and Sterling trades just above 1.21 at 1.2104.

So far this morning China has published its latest growth figures revealing the world’s second largest economy has grown at its slowest pace for nearly three years.

GDP increased by 8.1% down from 8.9% in the previous quarter and below expectations of 8.3%.

The numbers are being blamed on the fall in demand for exports from the Europe and the US and consequently we could see risk assets hit hard today.

To end the week we have the Michigan confidence figure, which assesses consumer confidence on personal finances, business conditions and purchasing power based on telephone surveys and provides a real time assessment of US consumer sentiment.

The spotlight is returning to Europe after a brief period of calm. The spread between the benchmark German 10 year bond and its Spanish and Italian counterpart’s widened on continued bearish data and rumours that GDP estimates across the southern Mediterranean countries will be sharply revised downwards.

The uncertainty remains whether the eurozone has enough left in reserve for when Spain or Italy need emergency rescue loans.

The worry is dragging down equity markets from recent highs along with risk currencies like Sterling and especially the commodity currencies which have been the main casualty of recent risk aversion.

There are several bond auctions in the eurozone today; Germany and Italy tap the well for smallish amounts of €3 billion and €5 billion respectively.

There will be strong demand for German debt as ever, but with the problems from last week’s Spanish auction fresh in the mind today’s offering from Italy will be closely watched for overall demand and also the price the market charges the Italian government.

The ECB meeting is on Thursday this week where it is unlikely that they will make any changes to interest rates or the special liquidity measures.

With risk sentiment waning, extra importance will be given to the Chinese GDP data due on Friday.

The data is expected to be around the magical 8% level, as it always seems to be.

Anything lower would be a real shock and compound the bearish trend we’ve followed this week.