Euro higher pre-IFO otherwise markets in holding pattern

• Chinese data set the tone for the week

• GBP inflation expected to remain below target

• Euro bid after French PMIs and pre-IFO

• US consumer confidence expected to back up Yellen

Ahead of next week's slew of data points - PMIs, ECB and payrolls - this week was always going to be a slow burner with investors likely to keep things in a holding pattern. Yesterday's markets did little to change this pattern.

Chinese data disappointed, limiting the near-term expectations of a bounce back from the Chinese New Year celebrations. AUD slipped on the announcement, and alongside CNY, looked to be in for a tough session. A slight recovery was seen instead as the the market became more and more comfortable with the idea of Chinese stimulus. It is our view that the Chinese would rather fight a small battle now than miss an opportunity to prevent further issues later down the line. We will now get to see whether the positive impact around Chinese stimulus will outweigh the negative of a more hawkish-sounding Fed. In the meantime, risk aversion pre-data will remain the key driver of markets through the week in my opinion.

Euro drove higher on the session with another break of the 1.38 mark against the USD in morning session following a strong set of French PMI numbers from both the manufacturing and services industries. Services was 51.4 vs 47.5 and manufacturing was 51.9 vs 49.7 expected; both exhibiting growth and the composite hitting a 30-month high. Germany's numbers disappointed, however, clipping the single currency's wings a tad before another leg upwards ahead of today's German IFO business sentiment index. Whether the impact of Crimea and Russian sanctions will continue to weigh on German businesses will be shown at 09.30, but in the meantime, the euro remains supported given the absence of particularly negative data and an European Central Bank that is happy to let things play out and hold policy as is for now.

Sterling has continued to drift as the markets have become sanguine about just how much higher near-term rate expectations can go. A natural unwinding of a year of strength is also healthy for the cross and today's inflation numbers could facilitate further weakness. CPI is expected to spend a 2nd consecutive month below the 2% level following 49 consecutive months above it. Price increases are expected to speed up in the 2nd half of the year as wage increases become stronger and more common, but the near-term view of the price picture is one of calm; not disappointing on the low side, not too aggressive on the high side, and therefore, unlikely to promote much market or central bank reaction.

CPI is expected to have risen 1.7% on the year with the core number at 1.5% and is due at 09.30 GMT.

Since Janet Yellen's press conference last week the focus has switched back to the USD. With the median Fed official now expecting rates of 1 per cent by the end of 2015, up from 0.75 per cent in December, the key will be further greenback strength and whether it can continue. Rallies for the dollar have been rarer than hen's teeth this year, and my prediction of a year marked by a strong USD was looking dangerously like a rotten egg. This move is a natural revaluation of the playing field.

Yellen said last week that the Fed may have 'over-did' the optimism in January around the US economy. We would agree and suggest the market over-did the pessimism in February and marked down the USD too far. Yesterday's moves help redress that balance. Previous rallies for USD have been quick to end however, as issues from Europe have dominated proceedings and a reversal of at least part of this USD strength could be forthcoming. A strong reading at today's consumer confidence release would go someway to put the greenback higher.

Have a great day.