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.

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.

Fears in Europe have escalated a notch amid growing concern on both economic data and political cohesion.  This morning S&P have taken a negative rating action on 16 Spanish banks, in addition press reports out of Germany suggest that a Merkel-Hollande alliance will not be as straightforward as the Merkozy alliance.

At the moment the euro is holding up fairly well as the market has been selling the US Dollar on sentiment that the Federal Reserve will ease further, however the underlying negative tone will be a concern to the markets.

Later this week the ECB are expected to leave interest rates on hold, however Mario Draghi will face tough questions in the press conference on the strategy for Europe amid growing concerns for a growth compact.

USA jobs data will be a main data point to watch this week.

Friday’s non-farm payroll report will form important sentiment for the pace of the US recovery after last month’s disappointing number which followed a good run of jobs data.

The number is expected to be a good number and the feedback on this data will be a key factor for the Feds future strategy-a bad number and we can expect more easing.

In the UK, attention will focus on the PMI data tomorrow and Thursday which will offer a snippet of growth feedback following last week’s preliminary Q1 GDP which came in negative.

Again if data proves negative it could trip the Bank of England to pump more QE through the system- possibly at the May MPC meeting.

Like the rain in the UK over the last few weeks it never rains, but it pours. The weather in Spain may be better, but economically the situation continues to be dire.

Overnight S&P the ratings agency, cut the Spanish credit rating to BBB+ from a reflecting the increased fear that the government will need to provide further fiscal support to the ailing banking sector.

To compound matters, the Spanish unemployment number came in higher than expected; a staggering 24.4% of the population is now without a job.

The figure is higher amongst younger people, with almost half looking for work.

As labour market laws are overhauled unemployment is likely to get worse before it gets better, meaning there will be further pressure on the Spanish credit rating and hence the rate at which Spain can borrow in the market moving forward.

Amazingly, Sterling shrugged off the negative GDP figure on Wednesday and now trades slightly higher against the Euro and Dollar than before the announcement.

This is probably due to the worse than expected European news more than Sterling gaining, but the Pound is likely to come under pressure at some point over the coming week.

The US Dollar remains subdued after the Fed statement earlier in the week neither confirmed nor ruled out further easing.

The uncertain stance has left the Dollar slightly rudderless given that we are also fairly risk neutral across the markets as a whole (but on the negative side of neutral).

That should come to an end when the US GDP number comes out this afternoon, with expectations of an annualised rate of 2.5%.

UK Q1 GDP has come in at 0.2% which means the UK is confirmed in a technical recession (the final GDP figure is out later in the month). The news has trimmed 50 points from Cable and Sterling-Euro in quick time and will keep the Pound on the back foot for the rest of the day.

As we thought it was the construction sector that dragged the number down, showing a decrease of 3% in Q1 2012.

Eurozone data is light today so the focus will remain on the politics of austerity and how it continues to disrupt single currency governments.

With the Dutch cabinet resigning at the beginning of the week, the uncertainty over the outcome of the French election and German Chancellor Angela Merkel facing open rebellion by other European nations over her demand for further austerity, euro sentiment is taking a beating and dragging the euro lower with it.

Today marks the end of the two days FOMC interest rate meeting in the US.

It is expected that the Fed will keep rates and QE on hold, but as ever, it will be what the Fed indicates it will be doing over further easing later this year that moves the markets.

Wording will be key, but we can expect the Fed to continue to the cautious optimism tone of recent meetings.

Also later today is the US durable goods order figure, with consensus estimates showing a decline of around 1.5% in March?

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 UK has offered just under £10 billion in loans to the International Monetary Fund (IMF) to help economies in trouble.It is part of a global effort to bolster the fund’s lending capacity, which IMF managing director Christine Lagarde wanted to increase by £250 billion ($400 billion).

The UK is not alone in funding the lifeboat. Japan will contribute $60 billion, Australia $7 billion, Singapore $4 billion and the Republic of Korea $15 billion.

The IMF had already received commitments of $320 billion.

Finance ministers from the G20 group of leading economies discussed boosting the IMF’s resources at a meeting in Washington.

Mr Osborne said the loan was important to the UK: “It’s in Britain’s interest that we have a stable and strong world economy – that creates jobs in Britain.”

He added that any loan made would bring in a return in the form of interest.

He can lend up to £10 billion without parliamentary approval because Parliament has previously approved £40 billion of loans, of which only £30 billion has so far been committed.

But this latest pledge is unpopular with some members of Mr Osborne’s Conservative Party, who had been urging him not to sign up to an increase.

Backbench MP Peter Bone described the decision as “bonkers”, describing any efforts to prop up the eurozone as a waste of time.

The UK Independence Party leader, Nigel Farage, said: “[Mr] Osborne must tell the IMF that he will not donate one more penny piece to the failed euro bailouts.”

The Treasury says its contribution to the IMF is not public spending. All UK loans to the IMF are financed from the UK’s Official Reserves, remain UK assets and do not contribute to public sector net debt.

The IMF hopes that if private investors think that countries in trouble can be rescued if necessary, they will be more willing to lend to them and any funding problems will not escalate.

It has already warned that the eurozone’s debt crisis poses the biggest threat to the global economy, and warnings about Europe are expected to top the eventual communique from the meetings.

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.