As expected, Chinese economic data printed weak but was within market forecasts, spurring a small relief rally in risk in late Asian trade today. Chinese GDP came in line at 7.6%, Retail Sales were slightly better at 13.7% versus 13.5% while Industrial Production missed its mark at 9.5% versus 9.8% eyed.

Overall this was the slowest pace of expansion in three years indicating a clear slowdown in growth in world’s second biggest economy. However, China Daily reported that officials expect growth to rebound to 8% in Q3 and 8.3% in Q4 reaching the key 8% target by end of the year.

Investors now expect a soft landing for the Chinese economy with PBOC anticipated to lower rates 2 or 3 times before the end of the year in order to stimulate demand, yet with Europe – China’s biggest export market – showing few signs of improvement the prospect of further contraction in Chinese rate of growth remains a very real possibility.

The Aussie reacted best to the in-line data, rallying to a high of 1.0173 in the aftermath of the news after touching the 1.0100 level earlier in the day. However, as European session got underway much of the enthusiasm from the relief rally has faded and the pair has fallen below 1.1050 level once again. The unexpected two notch downgrade by Moody’s of Italian sovereign debt has further dampened risk appetite creating fresh downward pressure on the unit. Investors will now focus on the Italian 10 year bond auction at 10 GMT today to see the market response to the latest news.

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