European markets had a disappointing session yesterday finishing lower across the board with investors reluctant to get too involved as Italian politicians lobbed a few verbal grenades in the direction of eurocrats in Brussels.

Despite the verbal volleys being lobbed back and forth equity markets did manage to close well away from their low points of the day.

US markets had another mixed day with the Dow making a new record high, while the S&P500 struggled, and the Russell 2000 had another day of sharp losses. 

The US dollar rose for the fifth day in a row against a backdrop of rising political concerns in Europe, sending the euro to its lowest level in six weeks as the war of words between Italian politicians and EU officials continued unabated.

Italy’s deputy Prime Minister Luigi Di Maio insisted that there was no chance the budget would be altered in any way, while Claudio Borghi, the chief economic advisor of the ruling Lega party stated that Italy wouldn’t be in the position it now if it still had the lira.

While he later rowed back on those comments and Italian Prime Minister Conte stated that the euro was irreversible and Italy had no plans to leave, the fact that politicians feel the need to constantly reiterate this line speaks to a fundamental weakness at the heart of the single currency area.

When was the last time you ever heard anybody question the integrity of any other G8 currency, and it is this that remains a boil that is proving to be very difficult to lance for politicians and central bankers across the bloc.

The mood wasn’t helped by the EU Commissioner for economic affairs Pierre Moscovici lecturing the Italian government on the need to respect the fiscal rules, conveniently forgetting that when he was French finance minister, France regularly broke the very same rules, something that hasn’t gone unnoticed in Rome.

The EU commission appears to be faced with a choice, put Italy into excess deficit procedure and sanction them, without fining them as they have done in the past with France and Germany and let them get away with it averting the fight the Italian government appears to be spoiling for, or draw a line in the sand with all that entails, in terms of escalation risk. While the markets can exert some form of discipline in the form of downgrades and capital flight, the EU commission may have to decide whether drawing that line in the sand is worth dying on a hill for, and potentially precipitating a full blown crisis.

European commission President Juncker also chipped in comparing events in Italy, with the recent problems in Greece, another comparison that prompted a strong response from Italian deputy PM Matteo Salvini.

The pound also slipped back after the latest UK construction PMI for September showed that economic activity slowed to its lowest level since March at 52.1, with civil engineering proving to be a particular drag. House building and commercial construction remained fairly solid.

Having seen manufacturing beat expectations and construction slip back, the focus will be on today’s UK services number to round off Q3 and a decent economic performance for the quarter. Thus far for Q3 services activity came in at 54.3 for July and 53.5 in August. Today’s September number is expected to show a slight decline to 54, which would be pretty much in line with the average, and point to another fairly decent expansion. 

It’s also services PMI day for Spain, Italy, France and Germany and here the numbers are slightly better than the manufacturing numbers we saw on Monday. For Spain and Italy expectations are for improvements to 52.9 and 52.8 respectively, while France and Germany numbers are expected to be confirmed at 54.3 and 56.5, the same as last week’s flash estimates.

In the US the latest ADP employment report and services ISM numbers for September are expected to point to tight US labour market and decent economic activity. The ADP report is expected to show 187k new jobs, up from 163k in August while the ISM services report is expected to come in at 58.1, down slightly from 58.5.

EURUSD – finding support just above the 1.1500 level for now. A move below 1.1500 has the potential to open up a retest of the August lows at 1.1300. We need a move back above 1.1690 to stabilise and a return towards the 1.1750 area.

GBPUSD – slipped below the 50-day MA at 1.2990, finding support at 1.2940, trend line support from the August lows at 1.2660. A break below 1.2930 opens up a return to the 1.2850 area. We need to see a move back through the highs this week at 1.3120 to open up a move back to 1.3220.

EURGBP – currently holding on to support near the 100-day MA, and 0.8860. A move below the September lows at 0.8845 could well see further losses. Resistance comes in at the 0.8940 area with the bigger level remaining back at 0.9040.

USDJPY – moved up through the 113.20 level and the highest levels this year bringing the prospect of a move towards the November 2017 peaks at 114.73. Support now comes in at the 112.60 area and below that at 111.80.

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