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.

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.

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.

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.

Yesterday European shares and the euro came under renewed pressure after confirmation that Spain’s economy was again in recession and German PMI for April was unexpectedly down. To add fuel to the growing fire the Dutch PM and entire cabinet resigned piling political worries on top of economic woes.

Along with a steep fall in shares we saw spreads widening between struggling sovereign Euro economies and Germany, in addition the Dutch/German spread widened.

Lots of risk aversion in afternoon trading yesterday with the main benefactors being the US Dollar and the Japanese Yen.

Today we have started a little brighter and bond spreads have narrowed slightly from yesterday- the main reason for this is that Dutch, Spanish and Italian bond auctions all went well helping to firm up the Euro from yesterday’s lows.

The main take from yesterday is just how quickly things can turn sour and this highlights the fickle position of the ailing euro.

Today we have seen UK data in the form of public sector net borrowing which showed that the government borrowed more than expected for March but still met its annual target.

Tomorrow we see the crucial preliminary first quarter GDP data.

We have seen some bright sparks in the UK economy of late in relation to unemployment data and retail sales.

However the data has been inconsistent and we have seen a weak performance in the construction sector which could lead to a negative number.

Tomorrow’s number if negative would be a huge blow psychologically to the UK’s recovery and will undoubtedly hit confidence in the UK’s recovery strategy and the pound.

Conversely if we see a stronger than expected number we could see the Pound rally further after a strong performance recently.

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.

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 eurozone is still heavily under the spotlight as Spanish and Italians’ debt interest rates are still dangerously high.However sentiment that the ECB could resume emergency bond buying has helped to ease fears.

The euro still remains pegged toward 1.31 against the US Dollar and 1.30 remains a key support area for EUR/USD and given the consolidation at 1.31 we could see some recovery towards 1.3150 to 1.32.

The Pound on the other hand is going from strength to strength and has hit a one year high on a trade weighted index- that is the Pound as a measure against a basket of currencies.

The Pound initially edged higher against the euro in line with euro concerns and improved economic numbers from the UK.

Sterling however has not managed a sustained push higher against the euro. This suggests a lack of appetite to sell the euro too much as the market adopts a wait and see approach to the developments on Spain and Italy.

In other news the yen fell for a second day against the dollar and euro after Bank of Japan Governor Masaaki Shirakawa indicated further easing of monetary policy.

Later today we see further feedback from the US with initial jobless claims and the producer price index- with markets in risk off mode and following weaker than expected payroll numbers last week a good set of numbers is hoped for.

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.