The UK’s trade deficit narrowed in March, driven in particular by stronger exports to the US, China and Russia.The seasonally adjusted trade deficit in goods and services was £2.7bn, against £2.9bn the month before, the Office for National Statistics said.

Car exports in March were worth £200 million more than the previous month.

The deficit on seasonally adjusted trade in goods was £8.6 billion in March, unchanged on February.

The ONS said that the surplus on trade in services was estimated at £5.8 billion in March- up compared with a £5.6 billion surplus the month before.

The deficit in trade in goods with EU countries widened by £700 million to £4.5 billion in March, compared with the deficit of £3.7 billion in February. Exports were virtually unchanged at £13.2 billion, and imports rose by £800 million, or 4.4%, to £17.6 billion.

Trade in goods with non-EU countries reached record levels, with both imports and exports at an all-time high in March.

Imports to the UK of goods from non-EU states rose by £700 million, or 4%, to £17.3 billion, while exports rose by £1.4 billion, up 12.1%.

That left the overall deficit on goods trade narrowing by £800 million to £4.1 billion, compared with February’s deficit of £4.9 billion.

The value of chemicals exported to non-EU countries rose by £200 million in March. The shipbuilding sector also saw the value of exports rise by the same amount.

A study completed by the National Institute of Economic and Social Research (NIESR) is predicting the UK unemployment rate will rise from the current 8.3% to nearly 9% by the end of 2012. The study blames low growth in the coming two years as the UK steers itself out of this technical recession.

NIESR recognized that later revisions may alter this, but said “small quarter-to-quarter movements of this sort are largely irrelevant to the broader picture of an economy that remains very weak”.

The big ticket data release this afternoon is the US non-farm payrolls.

It’s been a mixed bag data wise leading up to today’s announcement so there is a large degree of uncertainty over the actual number.

Consensus estimates are for 175K jobs created in April, initial jobless claims yesterday came in better than expected which point towards a positive number but at this stage it is difficult to call.

The Dollar has regained significant ground against Sterling in the last week and the risks remain to the downside, however if the number disappoints and we could be trading above 1.62 quite quickly.

The sterling/euro exchange rate has broken its correlation with movements in EUR/USD for the time being, with self-governing Sterling strength evident.

This is been confirmed by the shift in interest rate differentials between the UK and eurozone, a move which has gone in favour of GB Pound strength.

The view now points to some further downside potential in this currency pair, with a test of technical support around 0.8067 on the cards.

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.

A surprise increase in the US ISM manufacturing survey yesterday evening was enough to push the Dow Jones industrial average to its highest level in four years, dragging European bourses higher this morning along with the high risk currencies. Due to the May Day bank holiday in Europe, markets on the continent are playing catch up with the US and UK and are performing very strongly in early trading.

Chinese manufacturing PMI also showed a slight improvement overnight, but is still below the 50.0 level, signifying a contraction in manufacturing output.

This afternoon the ADP employment report is released in anticipation of the non-farm payrolls on Friday with expectations of 175K jobs created in April, not quite the numbers we saw in the first three months on the year but positive non-the-less.

Portugal goes to the market today, issuing six and twelve month treasury bills.

The target amount is only €1.25-1.5 billion, but the auctions will be closely watched as ever and expect overblown hysteria if we any signs of weakness.

Ahead of the auction the spread between the benchmark ten-year bonds is slightly higher, sitting at 902 bps in current trading.

The euro is marginally weaker this morning against the US Dollar and Sterling.

From the data just out, French and German PMI were broadly in line with the flash estimates but German unemployment rose in April and it is this that is leading the Euro weakness this morning.

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.

As Wise Money blogged yesterday the official figures from the Office for National statistics indicated that the UK economy fell more quickly towards the end of last year than initially thought. GDP fell by 0.3% in Q4 last year as opposed to the 0.2% reported. This fall shows a change from the 0.6% in the previous quarter and takes the overall growth figure to 0.7% down from 0.8% estimation.

One of the main drivers behind this fall is the 0.7% drop in manufacturing followed by 0.2% construction and services at 0.1%.

So far today Nationwide have revealed that house prices were pushed lower than a year ago for the first time in six months following a 1% fall in March.

Nationwide are attributing the slow down to changed in the stamp duty rules causing a “headwind” in an already difficult environment.

Since the budget first time buyers must now pay 1% on properties worth more than £125,000 following a two year holiday and there’s a new super stamp duty for properties sold over £2 million where a 7% payment is now due.

The figures were based on Nationwide mortgage data and indicated falls in all but three regions which were London, North England and Scotland.

The combination of these stories has put Sterling under pressure so far this morning with cable dropping off from the mid 1.59s yesterday to 1.5891 at present but up slightly against the Euro at 1.1971.

With the relative calm in the markets investors are becoming increasingly comfortable with the lack of movement in currencies.

This in line with the fall in risk aversion as market concerns over US growth and Eurozone debt problems retreat.

In the short term there is little catalyst to shake markets out of their trance and we could see euro/US Dollar continue to drift higher.

Certainly, firmer risk appetite, is a positive driver for the euro while the pull back in US bond yields has restricted the Greenback.

The UK’s Q4 final GDP has come in at -0.3% which is lower than the expected -0.2% and is a disappointing number for the Pound which has faded lower this morning against the euro and the US Dollar.  The number is not a great surprise but more of a disappointment and will heap pressure on the Q1 2012 GDP to come.

The US Dollar remains somewhat on the back foot following Fed chairman Ben Bernanke’s dovish tone earlier in the week with rhetoric suggesting more QE could be required and the loose monetary policy stance is here to stay despite a sustained run of positive economic data.

The USD has managed to claw back a little overnight against the EUR and the GBP- this corresponds to a move out of risk on weaker Chinese data.

Elsewhere risk currencies such as the Australian Dollar have come under pressure overnight as further concerns of a slowdown in China have dampened demand for risk currencies.

February’s industrial sector profit fell 5.2% year to date, the markets will be closely watching the situation in China.

Essentially China and the US are the key drivers behind global growth and any signs of slowing growth will turn the markets into risk off mode benefitting the safe haven shores of the USD, JPY and CHF and weakening risk on commodity based currencies such as the AUD & South African Rand.

Sentiment remains the primary driver of the euro as the single currency sold off sharply in afternoon trading yesterday after Eurozone members decided to delay more than half of the €130bn Greek bail-out funds.  A decision that was supposed to finally put to bed the Greek issue, at least for a couple of months, has managed to calm volatile markets for less than two weeks.

Thirty eight different measures need to be implemented by the Greek government before the remaining €71.5bn is handed over.

This may be as early as next week. But slicing the payment in two allows hardliners in the Netherlands and Germany a foot in the door and the potential for further delays.

It is this uncertainty which is hurting euro sentiment and pushing the Sterling pair back towards the 1.20 level.

Sterling remains stuck in recent trading ranges and as expected this week’s construction and manufacturing PMIs have not moved the Pound at all.

The manufacturing number was lower than expected and was cancelled out by better than expected construction figure this morning.

Next week is huge for big ticket data with the ECB and Bank of England rate decisions and the US non-farm payrolls the highlights.

Encouraging economic developments provided wise money markets with an appetite for risk again. Despite weaker than expected US durable goods orders, a rise in US consumer confidence to its highest since February last year provided stock markets and risk assets with an overall a boost.

It was a similar story in Europe as Italy held a successful auction of 10-year debt at a lower than expected cost at the same time as Portugal approved a third review of its bailout agenda.

However, there was some negative news, with the ECB momentarily deferring the eligibility of Greek bonds as security for its backing and Eire calling a referendum on the European fiscal compact.

Nevertheless, expectations of a strong take up at today’s ECB second 3-year Long term refinancing operation (LTRO) should keep markets on the straight and narrow for the rest of this week.

As for the US Dollar and given the upbeat equity market mood overnight it is no shock that the Greenback was on the slide as the euro appears determined before today’s 3-year LTRO by the ECB.

Bernanke’s Semi-Annual Monetary Policy Report later today will provide the Dollar some bearing but no major surprises are expected.

The euro will continue to rally against the US Dollar if we are correct about a strong euro 600-700 billion take up at the LTRO but it will interesting to see if the 1.35 level can be breached.

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.