China’s inflation rate has drop to 3.4% in April from 3.6% in the previous month and below the Chinese government target of 4%.This will reduce the headache for the government as rising consumer costs have been one of the biggest causes for concern in recent times reaching as high as 6.5% in July last year.

The drop in the oil price has certainly helped China’s progress alongside its bid to improve domestic demand to offset their fall in global demand for their exports.

Recent data suggests that Chinese consumption is struggling as imports grew only 0.3% last month compared to 5.3% in March.

Consequently investors will be keen to see how policy makers act within the next few months, perhaps leading to a cut in interest rates.

Back in Blighty, the NIESR National Institute for Social Economic Research (NIESR)’s reserach indicates that UK GDP grew by 0.1% over the quarter to April following the 0.2% drop in the previous 3 months.

Details of the report revealed that the negative output is expected to widen further as a result of the sluggish economy.

They expect the UK economy to remain broadly flat over the next 6 months according to the report.

These latest figures support the Bank of England’s case to maintain low interest rates in an attempt to boost growth.

As expected both the interest rate decision and the QE programme where left unchanged yesterday.

The sentiment in the money markets shifted again over the weekend as China commented on the Eurozone’s planned bailout package. China, which has taken even more focus lately as European leaders look towards the Eastern powerhouse to invest billions more into Europe to prop up the ailing economies and banks, have yet to confirm their position.

The most recent comments stated that China will co-operate and said “a prosperous and stable Europe is important to China’s stability and development”, but it will not be the “saviour” 0f indebted nations- handing over “dumb money”.

This is likely to keep French President Nicolas Sarkozy up at night as he has been on the phone to his Chinese counterpart saying Beijing has a “major role to play” in Europe’s recovery.

The euro loss some of the ground it made towards the end of last week as traders looked at the potential of this new bailout package failing apart.

Europe needs China to add at least €60bn on top of what they already have put in to make this new step in securing Europe’s future viable.

Without it, there aren’t enough willing sovereign states or wealthy individual investors to progress and the top brass across Europe will have to look for yet another new way of saving the single currency.

What a day! Risk was forcibly thrown on the table as markets interpreted was most  had seen as just bare bones of a European rescue plan as reason to be cheerful,  and risk assets surged throughout the European session and overnight.  Leading the way was the Euro, up two cents against the Dollar and Sterling and looking increasingly like it will continue to march higher.

Not far behind the way on were the banks, which contrary to every other industry that receives a recapitalisation managed to convince the market that getting €106bn to shore up creaky balance sheets it is a good, rather than negative development.

Also helping sentiment was the American GDP figure although only inline with estimates, reassured investors that the world’s largest economy is still growing, albeit at a sluggish pace.

Reports today suggest that euro leaders will go cap in hand to China asking them to be a significant investor in the European Bail-out fund.

This move which was widely expected given the size of China’s foreign exchange reserves and their perceived desire to diversify away some of the vast amount of Dollars they are holding.

The interesting thing will be finding out the political cost of the money – silence on the currency manipulator tag- or human rights perhaps?

Whatever the economic and political motivations behind the news will lend strength to the Euro as we move into the weekend.

Money markets have held steady as they await details of an agreement to resolve the eurozone debt crisis.Stock markets and the euro rose in early trading before falling back.

Although a weekend summit of eurozone leaders was inconclusive, the outline of a deal was agreed, with a summit to finalise details set for Wednesday.

Eurozone leaders agreed to force banks to protect themselves against future losses, and to increase the firepower of the single currency’s bailout fund.

Following a robust rally in Asian markets, European stock markets had been up 0.5%-1% in the first hour of Monday trading on the apparent progress at the talks.

Asian markets had been lifted by positive data from China and Japan, as well as the apparent progress in Brussels.

But European markets later fell back, and by mid-afternoon trading the Cac 40 index in France and the German Dax were both fractionally lower, while London’s FTSE 100 was up just 0.3%.

Market sentiment was not helped by industry surveys released during the morning that suggested the French and German economies are still struggling to avoid recession.

However, key points of disagreement remain.

France had hoped that the European Central Bank (ECB) would support the EFSF, by providing it with loans that could increase the fund’s total capacity to 2tn-3tn euros.

But this idea was blocked by Angela Merkel.

Instead, governments are expected to agree that the EFSF can help out troubled eurozone governments such as Italy and Spain by providing partial guarantees to investors and banks who lend them more money.

There was also disagreement over the extent of losses that should be imposed on Greece’s lenders, with Germany seeking a 50%-60% haircut.

The ECB opposes any such increase, according to a footnote in an internal document on the Greek economy leaked over the weekend.

There are fears that a unilateral default by Greece – such as a debt write-off without lenders’ consent – could have unforeseen consequences, for instance by triggering payments under credit derivative contracts.

Another unknown element in talks is whether and how much non-European countries may provide support.

The price of copper – an indicator of market sentiment over the global economy – rose 6% in Shanghai trading. But after the markets opened in Europe, the rally lost some of its lustre.

The euro followed a similar pattern, rising half a cent against the dollar, before dropping back. By mid-afternoon in Europe it was trading at about $1.386, down 0.2% for the day.

The wise money markets have been fairly quiet over the past twenty four hours.Sterling has been slightly hurt by comments from Chancellor Osborne who said that fiscal strategy is giving the central bank freedom to keep interest rates lower for a longer period of time.

The publication of the Bank of England’s Quarterly Inflation Report headlines the economic calendar today.

However the market will be looking to Governor King’s interpretation of the report at this morning’s press conference. It will be looking to see if he continues to be more dovish than the projections in the report which would see weakness in GBP.

In the eurozone, the situation in Greece remains in focus this morning and has done over the last 24 hours.

Conflicting messages emerged yesterday from both Greece and Germany. Ultimately it seems no new agreement has been reached on a new bailout package for the country and so the debate will continue.

For now healthy risk appetite, evidence of which we have seen in the positive performance of global equities over the last 24 hours, is acting to support the Euro.  German CPI data has already been released this morning and came in as expected at 0.2%.

Mixed results from a slew of economic releases from China this morning- inflation held above 5% in April and lending exceeded analysts’ estimates, signalling that further monetary tightening may be needed to cool the fastest-growing major economy.

Consumer prices rose 5.3% from a year earlier and banks extended £71 billion (74 billion Yang) of local-currency loans.

The headline CPI reading has outpaced the government’s 4% target every month so far this year and Vice Premier Wang Qishan said inflation was the “most pressing problem” facing his country earlier this week.

Currency conflicts at the G20 gathering in Nanjing continue to undermine markets with the obvious divisions between member nations on the way forward causing the very moves that participants are looking to correct. The US, through Tim Geithner, maintain their attack on the Chinese policy of not allowing its currency to float freely, arguing that to adopt such a move would enable the Yuan to take on a much more high profile global role.

He adds that becoming a constituent of the IMF’s currency basket would be the clear evolution.

The European delegates remain wary of further Dollar strength with the French President, M. Sarkozy summing up the concern when he argued against the Euro, or any other currency, usurping the Greenback role as the global reserve medium.

He added that recent Euro strength versus the Dollar was unjustified.

Overnight, we saw the stronger Dollar from the last few days give up some of its gains on comments from Federal Reserve member Bullard clarifying his reported remarks from the day before.

He said that there is no consensus on the FOMC about ending QE2 early, and that this is unlikely to take place.

He also said that the Federal Reserve would be able to tighten policy by not necessarily pushing up official rates, but by starting to sell back assets adding that this cycle of tightening would be far more difficult to manage.

The weaker Dollar / stronger Euro scenario was further enhanced by yet more comments from ECB Board members, Bini-Smaghi and Stark who both cemented in the probability of a rise in the official Euro interest rate at next week’s regular meeting.

The former talked of rates being returned to normal levels in a “gradual way” whilst Stark pointed out the fact that policy rates at present levels were exceptionally low.

There was a raft of growing inflation reports from China, Japan, Australia and the UK.Chinese inflation for January was reported as expected at 4.9% but given that the authorities had altered the make up of the ‘inflation basket’, de-emphasising the food component and adding weight to residential related spending, we will need a few months’ reports to establish a new trend.

The Bank of Japan left both their official rates and the size of their asset purchase programme unchanged (zero – 0.1% target and Yen 5 trillion respectively) but did issue a slightly more upbeat assessment of the domestic recovery – a change in dialogue from the previous month which allowed the Yen itself to initially firm, although the ground was then lost to a firmer Euro.

The Australian Central Bank’ minutes painted a very rosy picture of their own domestic economy going forward.

Despite the expected impact to GDP of the severe flooding, the RBA view is that the economy will claw back the loss during the 2nd quarter and that solid job growth, tighter labour market and the medium term inflation outlook will mean that the current slightly restrictive policy stance remains appropriate.

UK inflation came in at +0.1% m/m +4.0% y/y which was exactly in line with median forecasts the main driver being fuel, restaurant prices, furniture and alcohol.

This has pushed Sterling higher this morning and now sits GBPUSD1.6091 and GBPEUR1.1889.

However, the real importance in the figure will be seen tomorrow when the BoE’s governor, Mervyn King explains the current strategy following the publication of the Quarterly Inflation Report.

Sterling still underpinned on the higher rates, sooner rather than later scenario.

The Greenback fell to a two month low against the euro yesterday as speculation that the US economic recovery will remain sluggish and mounting speculation that European officials are successfully addressing the region’s debt crisis. The dollar weakened against 13 of its 16 most-traded counterparts as housing starts declined to the lowest level since October 2009 and before data later today that may show continuing jobless claims increased.

The Chinese Yuan also reached a 17-year high against the Dollar as Chinese President Hu Jintao met with President Barack Obama at the White House.

Meeting yesterday for the eighth time, both leaders emphasised the importance of increased trade and said their two countries can keep building commercial ties while working through differences on currency policy and human rights.

The forex markets took a bit of a back seat during the day whilst attention turned to interest rates in general and monetary policies in particular.

With global central banks starting to look at normalising policies and thus interest rates, traders have edged yields higher almost across the board.

The next step looks likely to be the re-introduction from investors of carry trades and in order to achieve this, a funding currency must be sought.

The obvious choices are the popular Yen and Swiss Franc but there are perverse arguments for using the Dollar or Sterling as well.

Could be interesting once rates start moving higher

UK public borrowing figures have just been released and are, in a word, dreadful. Net borrowing figures were over £4 billion higher than forecast and one would think that these figures will be used to lend political support to the government deficit reduction plan.

Sterling dropped over half a cent against the Dollar on the back of the announcement and continued low consumer confidence data is also weighing on the Pound in early trading.

Festive cheer for Sterling seems to in short supply in the market in the run up to Christmas.

One point worth mentioning was regarding the one day trade forum hosted by China overnight.

In it, Vice-premier Wang Qishan expressed support for the European Unions attempts to control the sovereign debt crisis in Europe.

The news helped the euro claw back some of the losses incurred in the European and American trading sessions, but this morning’s announcement by rating agency Moody’s that it is placing Portuguese debt on review in light of a possible downgrade, means the Euro has started the day on the back foot.

On the plus side for the single currency, German consumer confidence remains high according to figures released this morning. But it has slipped back from highs of a month ago and missed the forecast level of 57.