The euro rose versus the dollar and the yen in early morning trade with stronger-than-expected GDP figures from China triggering some covering of short positions. China’s GDP growth slowed slightly in the fourth quarter of last year, rising by 8.9% as compared with the same period in 2010. While this was slower than the previous quarter’s growth rate of 9.1% expansion, it was still higher than what markets had been expecting and helped ease fears of a hard landing for the world’s second biggest economy. As well as lifting the euro, the news from China also helped commodity driven currencies such as the AUD. Despite the overnight move, however, the euro’s downward trend is expected to remain in place given the poor economic outlook for the region and talk of additional rate cuts from the ECB.

The issue of sovereign debt of course also remains a big problem, with sentiment further undermined by the news that Standard & Poor’s has downgraded the euro zone’s bailout facility, the European Financial Stability Facility (EFSF), to double-A-plus from triple-A. This seemed inevitable following the downgrading of a number of euro zone member countries late on Friday, but the confirmation is yet another blow for the euro, though Japan’s Finance Minster said that “I don’t think this will immediately shake the credibility of EFSF bonds”.

While the euro and risk trends remain sedate in the aftermath of the Euro Zone downgrades, there is still a sense of risk aversion related to the development. The currency holds steady as capital circulates to other European members while sensitive assets (like equities) find ill-earned confidence in the promises of stimulus from policy bodies. Nevertheless, the slide into recession and the low firepower for monetary policy officials as their balance sheets balloon aren’t going unnoticed. Price movement today clearly provides an opportunity for any Euro sellers as the risk to the downside is much more prominent than any key reversal in trend.

While the euro has made up some ground versus the dollar, it remains close to recent 16 month lows versus sterling. The GBP, however, remains at the lower end of recent trading ranges versus the dollar. UK inflation will be in focus today, with the CPI for December due for release at 9.30am. The headline rate of inflation is forecast to show a sharp fall back as once off factors start to fall out of the index.