Money markets were dealt a surprise as the Consumer Price Index (CPI) rose in the UK to 3.5% up from 3.4% in February according to the Office for National Statistics. The ONS blamed higher food prices specifically soft drinks, bread, cereal, meat, fruit and vegetables coupled with rises in clothing & footwear.

However there was some good news as utility bills were lower than one year ago following energy companies reducing tariffs in February last year.

All eyes will know be on the Bank of England as this latest rise could reduce the likelihood of additional Quantitative Easing in next months MPC meeting but with stuttering growth the Bank of England may have no choice.

So far today in the UK we have seen the UK Jobless Claims figures fall for this first time since last spring.

Unemployment fell by 35,000 to 2.65m according the ONS leaving the overall rate at 8.3%.

Furthermore we saw voting in the Bank of England for interest rates and QE voting come in at 9-0 and 8-1 to keep rates on hold and maintain the contribution at £3.25bln.

Sterling has rallied as a result of these figures and currently sits at 1.2212 against the Euro the highest reading since September 2010. Cable has also risen against the US Dollar and is fast approaching the key psychological level of 1.60 currently trading at 1.5979.

In other financial news Warren Buffet has announced he has stage one prostate Cancer which will create further hype around the successor to his Berkshire Hathaway business.

As for the rest of this week we are pretty light on data with inflation data in New Zealand, Canada and the Germany of any real significance.

The euro currency is enjoying a healthy bounce after the completion earlier in the week of a further Greek bailout to cover March debt obligations and through positive German data. Data from Germany showed that GDP had shrunk in Q4 by 0.2%, however strength in recent ZEW and IFO surveys suggest that the economy will escape falling into recession.

The euro was also helped by good news from over the pond as weekly US jobless claims came in unchanged at 351k and this level remains the lowest since 2008. This number has helped to boost the expectation that the approaching Non Farm Payrolls on Friday 9 March will better than market expectations.

Recently US data has started to show signs of improvement as the powerhouse that is the US economy looks as though it is slowly clawing back to growth.

For the markets this improves the appetite for risk and currently this is USD negative.

We have seen EUR/USD especially push higher and test 1.34- the highest level since December, GBP/USD has also edged higher but the pound remains a little subdued.

Wednesday’s MPC minutes helped to put a dampener on the Pound as expectations rose for further QE in 2012- probably in May.

With inflation falling and economic growth struggling then QE remains very much on the table with a cocktail of low interest rates to remain.

The Pound has fallen on the back of this market feedback and is struggling to gain momentum even in a sentiment which has turned risk on.

Since the beginning of the year EUR/USD has gained around 4%. The pair is trying to sustain a level above 1.3200 but struggled during Asia trading.

The euro rally is largely attributed to short positions hit an all time high for last week.

However, headline data is unlikely to provide much force to the Euro, with monthly series of PMI manufacturing confidence indices as consumer confidence readings will be under the spot light.

Realistically the figures will demonstrate some stability but investors will centre attention on the EU Summit beginning today and continuing Greek debt talks in addition to Italian debt auctions today.

Greek debt talks are likely to be confirmed this week including write downs of around 70% but nervousness over a German proposal to create a “budget commissioner” could be detrimental to the Euro.

Under the spot light in the UK this week is the January PMI  manufacturing survey however there will also be interest on housing data including mortgage approvals and house price surveys from the Nationwide and Halifax.

In general the data will do little to dismiss fears about the UK economy following the contraction in Q4 GDP announced last week.

The Pound looks to remain sturdy against a backdrop of poor economic news however, but its gains look limited especially given the disclosure in the BoE MPC minutes that some members thought that additional QE will be required.

Having strengthened against the Greenback but weakened against the Euro over recent days, GBP continues to trade in a middle of the road manner.

Cable sellers will likely emerge around the 1.5870 resistance level while EUR/GBP is set to consolidate around 0.8350.

German Chancellor Angela Merkel told Davos-”We need a big rethink”.Germany’s Chancellor Angela Merkel has told the World Economic Forum that a “big rethink” is needed in the eurozone within the global economy.

“Structural reforms that lead to more jobs are essential,” she told delegates at the Swiss resort of Davos. “Do we dare to be more European?”

The eurozone is still struggling with a sovereign debt crisis and is trying to agree reform to its political system.

But many want Germany and other nations to boost the size of their rescue fund.

The International Monetary Fund (IMF) wants the eurozone to inject more cash into its rescue fund.

The IMF wants the sum available for bailouts to grow beyond 500bn euros (£416 billion) to ensure talks between private creditors and Greece do not grind to a halt.

The situation is urgent according to the IMF, which recently predicted that the economic growth rate in Europe could halve this year from an earlier estimate of 3.3% if the eurozone crisis remains unsolved.
Lessons learnt

Mrs Merkel disagrees with Ms Lagarde about what is needed.

“We have said right from the start that we want to stand up for the euro, but what we don’t want is a situation where we are forced to promise something that we will not be able to fulfil,” she said.

Mrs Merkel said that the austerity reforms being enacted – currently being felt from the Irish Republic to Italy – had to be balanced with reforms of how Europe is governed.

Mrs Merkel also acknowledged “tensions” between countries that have adopted the euro and those that have not inside the European Union (EU).

Given that the main euro paymasters Germany- and the IMF disagree on how to solve the euro credit crunch- there is only one way this story is going to go.

If you want to transfer your currency out of the eurozone, you can do so with our competitive currency converter service, please just click here now.

The European Central Bank looks to be facing a ticking time bomb as the cost of Italian debt shot through the roof yesterday.This left markets in free fall with the Dow Jones in particular dropping 3.2% leaving the eurozone facing its biggest economic ‘problem child’ to date.

On paper Italy looks too big to rescue yet is too big to fail.

The Italian’s have nearly €2 trillion in debt and is the third largest country in the eurozone and therefore it cannot be as easily dealt with as Greece.

Italy is required to raise €19 billion every month to meet its budget deficit and bond redemptions and with a continued increase in yields (hitting close to 7.5% for 10 year bonds) borrowing costs are rising sharply and fast becoming unsustainable.

Higher collateral haircuts on Italian debt are adding to the pressure.

Even though Italian PM Silvio Berlusconi has promised to step down following votes on austerity measures this may not lead to a sharp exit as this may not take place for weeks.

Furthermore, Berlusconi may try to re-obtain power after stepping down, which effectively brings us back to square one.

Meanwhile the prospect of Italy becoming the next country to need to a bailout will intensify.

This could lead to liquidity issues with only around €270 billion left in the EFSF bailout fund and the mechanics of how the fund will be leveraged to a planned €1 trillion is still uncertain.

This has lead to press reports that the major power houses of Germany and France have started talks to break up the eurozone due to worries that Italy will be too big to rescue will only add to a downward spiral on this story.

Under the spotlight today will be the 12 month auction of €5 billion in Italy.

Back in October the 12 month auction were sold at an average yield of 3.57% however this time we could see this rise above 6%.

What is most concerning is that it appears that even with the ECB buying Italian debt it has been insufficient to prevent yield rising.

In any case, given the ECB’s lack of enthusiasm to become the last resort lender to European peripherals, any further support from this direction will be limited.

Based on this the single European currency looks highly susceptible to further losses and we could see the EUR/USD drop through 1.35.

German ratification of an enlarged eurozone bail out fund was supposed to calm market nerves going into the weekend.However sentiment remains downbeat in early trading today and we can expect equity markets and risk on currencies to continue to struggle this afternoon and in the early part of next week.

Today is the end of the third quarter and with financial institutions set to report earnings over the next couple of weeks there is usually increased volatility as last minute balance sheet window dressing taking place, so be prepared for greater than usually swings in parings today.

Markets remain sceptical that European politicians have the political will and ability to finally put this crisis to bed because of the fragmented nature of the political system between member countries.

This is why we are hearing strong words from across the Atlantic about the need to for further enlargement of the bail-out fund, its current size would not support both Spain and Italy and the Germans have explicitly capped its size at the current €440 bn.

The New Zealand Dollar, not often mentioned by Wise Money was the big mover in the currency markets overnight after Standard & Poor’s downgraded their credit rating one notch from AA+ to AA.

The Kiwi Dollar responded immediately, falling across the board and compounding its recent declines on the back of the deteriorating outlook for global growth.

Which- if you have gone to see the rugby world cup will make buying any more kiwi dollars more competitively priced.

All of the so called commodity currencies are closely correlated to the outlook for world growth and it is the recent revisions by the IMF and other agencies that are the main reason the strongly performing high yield currencys like the Kiwi and Aussie Dollar and the South African Rand has lost ground against Sterling and the Dollar.

The huge gains in stock markets around the world yesterday were not mirrored in by corresponding moves in the currency markets, which saw only modest gains for Sterling against the Dollar and Euro. European politics continues to drive sentiment between euphoria and despair as first a Greek deal looked to have been reached, before this morning we find out there is still huge disagreements between member states over details of plan.

The Euro ship is lurching from side to side as traders and investors rush from one side to the other on the back of every new announcement.

On one side German officials have been joined by other creditor nations, Finland and the Netherlands, in calling for the private sector to take on a greater slice of any write down.

On the other side sits France, who are desperately trying to keep losses away from their banks, who only just survived a recapitalisation after heavy falls in their share prices in the past few weeks.

With a lack of Sterling data this week and with the Bank of England meeting coming up next week, the MPC have all hands to the pump trying to warn the market of another round of quantitative easing coming either next month or more probably the month after.

Several members have indicated that they may join Adam Posen in voting for further monetary easing if the economic picture continues to deteriorate.

Careful not to push market expectations to far, the MPC hawk Andrew Sentence has also been in the press stating worrying about the inflationary effects of another round of QE.

What the Bank is making clear is the clear change of stance from a neutral wait and see, to a much more dovish tone and for Sterling that looks like it will be enough stall any sort of recovery against the Dollar in the near term.

The FTSE fell dramatically yesterday losing nearly £50 billion (-3.7%) as traders were bombarded by bad news.RBS was one of the worst performers, dropping 12 % after it was announced over the weekend that it is being sued by the US Federal Finance Housing Agency over allegations it misled buyers of mortgage portfolios.

Barclays and HSBC, are also in the firing line over a combined $11bn of suspect mortgage packages, lost 6.7 % and 3.8 % respectively.

The banking sector overall hit a two year low.

In addition to the banking news a deeper fall than expected fall in service sector growth also hit the FTSE, with the Markit/CIPS services purchasing managers’ index dropping from 55.4 in July to just 51.1.

The bad news was set against the familiar backdrop of Eurozone fears, with German and French indexes also suffering.

Angela Merkel’s government faces a court ruling tomorrow over claims Berlin is breaking German law and European treaties by contributing to bailouts.

This morning has seen dramatic events continue, the Swiss National Bank (SNB) set a minimum EURCHF exchange rate of 1.20, citing the recent strength as a threat to their overall economy.

SNB officials claim they have unreserved quantities to enforce the minimum exchange rate of 1.20.

So far this has been successful as we saw the EUR rise of from 1.10 to 1.21 in a matter of minutes.

This has been the latest attempt by the SNB to weaken its “Safe Heaven” currency as export limitations are beginning to hurt their overall economy.

This is dramatic move by the Bank as previous attempts of increasing deposits available to commercial banks coupled with a cut in interest rates has had limited success.

Finally overnight we saw the National Australia Bank maintain interest rates on hold at 4.75% where it has sat for almost one year.

Following the decision, RBA Gov Glenn Stevens said a key question for economic policy makers now is the extent to which global recession fears temper inflation pressures within Australia.

“The uncertainty and financial volatility is reducing confidence and may result in more cautious behavior by firms and households in major countries… At this stage, little evidence is available to gauge any effects of the European and U.S. problems on other regions,” he said.

Yesterday the Swiss National Bank (SNB) cut their interest rates to 0%-0.25%- the main motivation behind the cut was to help weaken the Swiss Franc. Overnight the Bank Of Japan intervened in the markets to weaken the value of the Yen for the first time since March.

The bank also expanded its asset purchase fund by 5 trillion Yen and kept rates near zero.

Both the Yen and the Swiss Franc have seen exceptional currency strength recently and the currency gains were impinging upon economic growth- this is why exceptional measures have been taken in an attempt to devalue their respective currencies and support growth.

USD/JPY leaped up to 80.00 from 76  pre-intervention and GBP/JPY from 125 to 130.

The overall mood in the markets is still very mixed with intervention by the BOJ coupled with more negative feelers from the Euro periphery and real concern on the economic climate in the US.

Tomorrow we see non-farm payroll numbers from the US and this data will be hugely important on the backdrop of very negative data recently from the US economy.

It is key that the number is either above or in line with expectations- with the sheer volume of US debt it is vital that growth supports the fiscal condition of the US economy.

The credit rating agency Moody’s has downgraded Portugal’s long term government bond rating to junk- this has heightened fears that only eight weeks after their first bailout Portugal may need further help in meeting its debt obligations.This has rattled the euro which was recovering nicely against the US Dollar following the recent Greek fears- it also emphasises that the rot does not stop with Greece.

The Euro has lost over a cent against the US Dollar and has lost against all but two of 16 major currency peers.

The hard line taken by Moody’s in downgrading Portuguese debt by 4 notches sends a message to the markets that the ECB and the EU still have significant work to do and that their methods may not align with the credit rating agencies- a concern for the markets and the euro.

The ECB is expected to raise interest rates tomorrow which will have helped support the Euro even in the light of other issues- but quite how the PIGS will react is an open question.

The ECB is expected to raise rates by 25 basis points to 1.5% even in the light of slowing economic growth- a policy that is currently the opposite of the UK and the US.

However at the moment the euro is on the back foot and any more feedback from ratings agencies could pile on the pressure.

Over to the UK and the Pound has managed to claw back some of its losses against the euro- this is  mainly due to euro weakness as explained above.

Against the US Dollar the Pound is down- this is due to risk aversion which is US Dollar positive and again due to the Moody’s downgrade of Portuguese debt.

Data from the UK showed that UK shop price inflation increased sharply and a survey by KPMG-REC identified a slowdown in fulltime jobs growth.

However the Pound has been largely unaffected by this data- tomorrow we have the Bank Of England interest rate decision and it is expected that no change will be on the cards.