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.

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.

UK inflation figures were published this morning showing that price rises are still rocketing.  The CPI for September was up +0.6% and the year on year level up to 5.2%.RPI was also up +0.8% and 5.6% for year on year.

Normally, a strong inflation number indicates that interest rate increases could follow and thus we see a gain in the value of the currency.

However, we are not in normal market conditions and the uptick in inflation will not be reflective of future rate increases as the Bank of England expects inflation to fall back towards 2% in time.

The current weak growth that is threatening the UK’s recovery continues to overshadow inflation and with the risk of a double dip recession still lurking, the BoE has no choice but to keep interest rates low.

The fact that the number was higher than forecast is actually a negative for the pound and we have seen the pound dip against the US Dollar and slightly against the Euro since the numbers were released.

Late in yesterday’s trading, the Euro lost value as pessimistic comments from Angela Merkel dampened the positive mood that was building towards the October 23 summit.

Wise Money expects the euro and the US Dollar to be volatile ahead of the summit as the Eurozone leaders hammer out further bailout measures to support the single currency and some of its ailing economies.

Data yesterday showed that UK inflation continued its upward march through August with the benchmark CPI figure rising to 4.5% over the past 12 months.Sterling dropped immediately after the announcement, but the move was short lived against the Dollar as the Pound regained ground.

The Bank of England expects the rate to keep rising towards the five percent level, before peaking and then moving back towards the two percent target.

Whether you chose to believe the Bank given its recent forecasting record is a mute point.

On top of the shaky CPI estimates the forecast may be further derailed if we find out that further stimulus is back on the minds of the MPC when the minutes from the last meeting are released in a few weeks time.

Given that the recent quarterly inflation report presented the probability of further stimulus as quite low, the recent calls for another round of easing by the Bank could counteract the downward pressures to inflation that are currently expected.

Or we may see inflation stay stubbornly high and so contrary to BoE forecasts.

UK Jobless claims rose by slightly less than expected, pushing Sterling up slightly against the Dollar in early trading this morning.

The crisis in the Eurozone continues to morph quicker than policy makers can react to it.

French banks suffered huge swings in share prices yesterday as first fears over their ability to raise short-term Dollar funds sent prices down almost 10 per cent before statements denying the rumours caused a rebound of epic proportions.

BNP Paribas eventually closed up 7.2 per cent yesterday but there is no rest bite for the Gallic lenders this morning with Moody’s, the ratings agency, announcing a downgrade for SocGen and Credit Agricole with BNP Paribas placed on review.

Alongside this, we still have ongoing worry over the potential default of Greece.

German Chancellor Angela Merkel tried to reassure the markets after several of her political partners openly questioned if Greece was insolvent and/or should leave the Euro over the weekend as yields on 2 year Greek bonds fully departed reality and traded over 95% (remember when they were 35% and everyone was so worried?).

The ongoing problems have not stopped the Euro from retracing some of the move from Friday and Monday. The sheer size of the move means we may see the Euro strengthen slightly through the rest of the week.

Under the spot light this week are retail sales, inflation, industrial production and regional manufacturing surveys which will offer some direction to the Greenback and it is likely that the data over coming days will look less negative than in past weeks, giving the US Dollar some support. Having breached above its 200 day moving average for the first time in a year the Dollar index is set to start the week on a positive foot and will look to extend its gains throughout the remaining trading sessions.

On the other hand, EUR/USD continues to struggle, falling below its 200 day moving average in spite of positive news from Germany (rejection of bills in the constitutional court) and China assisting the Italians with their bond programme yesterday.

The ECB did not help the EUR’s cause however, with the change in its stance to a more balanced assessment of risks from its more hawkish stance previously.

However, the real damage occurred as speculation of a Greek default intensified and ECB hawk Stark resigned from the ECB council, highlighting the divisions within the governing board.

This week attention will remain on Greece as negotiations between the Troika (ECB, EU and IMF) and Greek officials resume.

Ahead of the talks Greece approved a further EUR 2 billion in austerity measures over the weekend but nonetheless, despite denials by Greek officials speculation of a debt default will continue to hammer the EUR lower.

So far today we had CPI data which came in at 4.5% from 4.4% in July according to figures from the ONS.

This sits well above the Bank of England’s target rate of 2% which is expected to return back to target within two years.

The ONS blamed continued pressure in energy prices as well as clothing& footwear but accepted some relief in transport services and recreation in particular game consoles helped to offset further price rises.

We got no blockbusting policy from Jackson Hole on Friday, but the Fed chairman failed to rule out further action if the US economic outlook continues to deteriorate.The markets were probably wanting something more concrete, but Uncle Ben did deliver the one thing guaranteed to lift equity markets – hope.

He talked about fiscal policy, probably paving the way for President Obama to announce stimulus measures in a speech on Sept 5th he also sounded reasonably positive on the economic recovery, which may or may not turn out to be ill judged given we have an important non-farm payroll number coming up this Friday.

Other US data of note this week include the minutes from the last FOMC meeting on the 9th August and consumer confidence, both due this afternoon.

Given the importance of Friday’s speech it is unlikely that we get anything unexpected in the Fed minutes.

Sterling should take a bit of back seat this week, it has been stuck in trading ranges against both the Dollar and Euro in recent weeks and with a lack of any substantive data due this week we can expect that to continue.

The little data that is due this week is mostly housing related and includes mortgage approvals and the Nationwide house price survey along with net consumer credit, manufacturing and construction PMI later in the week.

The Euro has started the week on a roll, gaining against both the Dollar and Sterling even without any real data to back up the rally.

The merger between two of the struggling Greek banks seems to have lifted market sentiment, but quite how two bad banks makes one good one is beyond logic!

FED Chairman Ben Bernanke has hinted that further Quantitative Easing is unlikely, saying instead the Fed is committed to keeping interest rates low until at least 2013.   Mr Bernanke indicated QE2 was on the way from Jackson Hole this time last year, and the markets responded better than even he could have predicted.

One of the aims of zero interest rates and QE is to force money into risk assets, and it looks like equity markets are setting up for the expectation of a further round of easing being announced. But they may be bitterly disappointed.

The key differences from last time are that the spectre of deflation, one of the key motivators for QE2, is not the threat it was a year ago and there is also dissent from 3 Fed board members further clouding the Feds ability to implement any new round of QE.

So how does the Fed’s announcement impact FX markets?

Safe haven currencies such as the Swiss franc, Aussie Dollar and the Scandinavian Krona’s look set to be very dependant on the outcome of Friday’s speech.

They have all benefitted from diversification out of Dollars and the prospect of further money printing by the US so we can expect significant moves in both directions depending on the content.

Special attention needs to be paid to the Swissie which has the SNB on the other side of the trade should QE3 go ahead.

Along with the US announcement (or not) Friday also sees UK GDP figures released. If we take the overall tone of recent UK data as a guide it is hard to be optimistic about UK growth.

There seems to be significant economic headwinds, set to get stronger as government spending continues to fall and companies hoard cash instead of hire workers.

In line with forecast is the best we can hope for. Later in the day, but before said speech, US GDP is also released along with the University of Michigan confidence survey.

The Swiss franc hits record highs against the US Dollar and the euro as attempts by the Swiss National Bank prove unsuccessful in slowing the currency’s rise. The decision to expand their liquidity policy did very little to ease pressure as traders looked for more aggressive action including the pegging to the Euro or US Dollar.

Following the announcement the CHF continued to strengthen which reiterated the point additional steps will be required and currently sits at 1.3118.

In what has been a reverse of the overnight session, the Greenback continues to recover lost ground with EUR/USD back on its lows and AUD/USD down to 1.0480.

Equities are falling further led by Seoul down 2.6%, Taipei down 2.0%, Sydney and Tokyo just over 1.0%.

EUR/USD touched a fresh low overnight removing the buying interest at 1.4390.

On the face of it, there appears no reason for today’s moves but then again there was nothing apparent for the overnight moves.

Elsewhere USD/SGD has surged higher today after the MAS flooded the forward market with domestic funds. Negative interest rates are really catching on amongst the strong currencies.

Today in the UK we had retail sales at 9.30am which saw weak growth for the month of July as cash strapped consumers cut back on spending.

According to the Office for National Statistics sales volumes grew inline with the 0.2% expected figure but down from last months figure of 0.8%.

The ONS statement blamed a fall in household goods, clothing and footwear as consumer’s battle against the latest CPI figures which indicated a number of 4.4% from June’s 4.2% and well above the Bank of England’s target figure of 2%.

Sterling as a result has fallen from the highs of yesterdays 1.6570 against the US Dollar and currently sits at 1.6487 and 1.1466 against the Euro.

The Euro has slipped lower in early trading after a lower than expected preliminary Q2 GDP German announcement. The German economy grew at 0.1% against a forecast level of 0.5% in the second quarter, which is a big miss in normal market conditions let alone the volatile markets currently prevailing.

Germany needs to be the driving force behind any Euro-zone recovery and the market will have to start to discount what happens if Germany begins to slow, given that France also reported stagnant growth last week.

The market is looking for some positive outcome from today’s meeting between German Chancellor Angela Merkel and her French counterpart Nicolas Sarkozy.

Any discussion of Eurobonds (shared debt across EMU nations) looks off the table at the moment – Merkel does not have the political clout to sell them to the German public currently, but the tide does look to be changing – so any announcements on measures to stop the crisis spreading further will be lapped up by an eager market.

But the run up in the Euro yesterday evening and overnight has probably set it up for disappointment unless Merkel and Sarkozy deliver a bombshell (Eurobonds) and that looks unlikely for reasons outlined above.

Sterling data due today includes the CPI reading, with expectations on a further rise in inflation from 4.2% to 4.3%.

The Bank of England inflation report last week seemed to set the scene for further rises so the market has been building in the data for the past week.

What is interesting is that the reaction has been muted because interest rate hikes look off the cards for the rest of the year and into the next.

Speaking of which, we will also get a glimpse into the MPC’s thinking with the release of the last MPC minutes tomorrow at 9.30 along with the key unemployment data and finally retail sales on Friday.

We should have a good picture of the UK economy at the end of the week, let’s hope it is slightly more positive than most participants currently think.

As expected, the ECB raised its base rate by 25 bps to 1.5% as it tries to curb rising inflation in Germany and France.The rise will however add pressure to some of the single currency’s weaker PIGS members, including Greece which remains in deep recession.

Meanwhile, the Bank of England’s monetary policy committee held Britain’s base rate at 0.5% despite inflation recently climbing to 4.5% – more than double the Bank’s 2% target.

This has been driven higher by the rising cost of essential items such as food and fuel.

A rate rise could help to bring inflation down towards the target, however analysts praised the move saying “stability was key to the country’s recovery”.

The BoE has warned that inflation will rise above 5% later this year and remain above target through 2012 before dropping off in 2013.

Yesterday brought strong US jobs data and the positive figures were welcomed in the US which has seen its economy hits the skids recently.

Weaker data paired with an ever growing debt pile have seen the Greenback slide over the last 3 months.

This week though has seen a revival in the Dollar as investors look for the safe havens to avoid the ongoing debt issues.