FX markets have begun, in a predictable fashion, to considering the data and events laden day to come. The softer than expected Chinese inflation data, kicked off the day by printing slightly below market expectations at 4.9 vs. 5.4% exp (4.6% prior). Interestingly, the decline came from a downward surprise in food prices, odd especially considering that the Chinese Lunar new year's holidays, generally create significant upwards pressure. So the benign read provided a glimmer of hope to some, that the PBoC would look to tighten quickly, however, both Shanghai and the Hang Seng closed lower on the day. Yet in the FX markets, trades saw this data as a positive and sold risk correlated trades, driving the EURUSD up to 1.3528. However, the feel good sentiment wouldn't last with German preliminary GDP on the docket. The Engine of EU economic growth and perhaps the only real hope for saving the fragile economic union, printed lower than expected at 0.4 vs. 0.5% m/m and 4.0 vs. 4.1% exp (French numbers also underperformed). Germany's growth is nearing full capacity and further acceleration will have a pronounced effect on inflationary pressure. The knee jerk reaction was to sell EURUSD which dropped to an intraday low of 1.3461. The Spanish January CPI showed that inflation was also high in the peripherals and the ECB might have further reason to begin tightening, given the Spanish results. The prospect of an ECB hiking well ahead of other G4 members, gave the EURUSD a boost, climbing quickly to 1.350. Looks like we are in for a very volatile and busy trading day. CDS prices for peripheral nations have continued to creep up, as concern over the solidarity in the Union seems to be breaking down and the lack of closure regarding WestLB, the German lender, and Landesbanken (regional wholesale banks) lingers on. Yesterday's regular monthly meeting of Eurozone finance minister, ended with no decision on comprehensive plan to reshape the EUs rescue mechanism. Although they did reach an agreement on the size of the ESM, Juncker stated EU's contribution to the ESM would enable the lending capacity of €500bn and the IMF would provide funds in addition. While this was a solid first step, its a hardly new or comprehensive solution and with the late march deadline closing in, traders are increasingly worried that nothing will get accomplished (a mood keeping EUR moves capped). Riksbank raise interest rates 25bp to 1.50 as was widely expected. However the accompanying statement was perhaps slightly more hawkish than anticipated, which should give the SEK support near term. The central bank stated that increase in wages & decrease in spare capacity would generate further prices pressure. Then went on to say that rates needed to be raised 'somewhat' faster, a central bank really can't get more hawkish than that. The highlight of the day should be the UK inflation data, which then starts a very busy week for the uk and sterling. Markets expect CPI and RPI y/y to hit a staggering 4.0% and 5.1%. This will put the RPI inflation at its highest level since 1991. Clearly the uncertainty surrounding the BoE rate path has made sterling trading difficult and we suspect that short term sterling trading will remain volatile and non directional. Todays reading should trigger another letter from the BoE Governor King to the Chancellor and set the stage for an interesting Inflation Report published tomorrow. In the US session, markets will be watching advanced retail sales for any signal that the consumer is showing up to the weak US economic recovery. The bitter January weather should make this release even more volatile than usual and a disappointing number could take the steam out the US treasury rally, pushing yields lower. Overall, we suspect that FX trading will continue to trade, in a wild and woolly fashion--so be prepared to hold on and keep your trades loose.