The economic outlook in Europe continues to look extremely uncertain not only with respect to future growth, but also from a political standpoint as well, as EU leaders continue to differ over the next best course of action with respect to the debt crisis.

Yesterday’s disappointing PMI data could have been shrugged off if Germany was still showing signs of remaining buoyant, but the revisions to German GDP components put paid to that perception as consumption, imports and investment were all revised lower.

It is now becoming increasingly apparent that the two rate rises instituted by the ECB earlier this year could well have been a factor in exacerbating the problems now playing out. The political discord isn’t helping too much either with Italy continuing to row back on its promises about fiscal austerity despite continuing to be the beneficiary of continued ECB bond buying.

With inflation also showing signs of stabilising, today’s Euro zone July PPI data isn’t likely to add too much to the debate with respect to interest rate policy, with prices set to move up by 0.5% month on month, and up 6.1% annually.

Given the problems in Europe it is becoming increasingly apparent by yesterday’s move lower in the single currency that the markets think the next move in rates by the ECB could well be lower. Clues to this could well be seen as early as next week at the September rate meeting.

In the UK concerns about growth are also rising after manufacturing PMI for August also contracted, but didn’t change too much from the previous month’s figure of 49.0.
Today’s release of August construction PMI is likely to show a moderate fall from 53.5 in July to 53.2, which would go some way to mitigating yesterday’s manufacturing figure. The bigger concern would be services PMI out on Monday which is expected to slip back from 55.4 to 54.3. Given that services makes up almost 70% of the UK economy, any slide there would increase concerns about Q3 growth substantially.

The big number of the day will be US non farm payrolls for August ahead of the long Labour Day weekend in the US on Monday.

At the beginning of the week expectations were for a number of around 90k, but as the week has progressed subsequent revisions have moved the bar lower. Yesterday’s ISM manufacturing number gave the markets a brief boost after the headline figure remained in expansion territory against expectations, however after scratching a little below the surface the picture wasn’t as rosy as first appeared with new orders contracting at 49.6, and construction spending for July falling back by 1.3% much more than expected.

There now remains a concern in some quarters that today’s number could well be negative, which would be a shock and certainly give the Fed and the markets food for thought. In any case the consensus has now moved to between 25k and 65k, with the unemployment rate staying at 9.1%.

EURUSD – yesterday’s decline took the single currency back below both the 55 day and 100 day MA which should open up a test of the downside, having also broken below the 1.4280 trend line from the 1.3835 lows.
The market does look a tad oversold on the four hour charts so further range trading cannot be ruled out.
The 1.4030 area remains the key long term support which is where the 200 week MA sits.
The major resistance remains between July’s peaks between 1.4535 and 1.4575/80.
In the interim pullbacks should find resistance below the 100 day MA at 1.4360 which had until yesterday acted as support for the last eight days.

GBPUSD – yesterday’s break lower, below 1.6220 gave is the move to 1.6170 and just fell short of the 200 day MA at 1.6110/20. This area remains the key support and obstacle for a move back towards 1.6000.
As with the euro the cable is a little oversold on the 4 hourly charts so could well be susceptible to sharp pullbacks towards 1.6340, and behind that at 1.6450 and 1.6520.

EURGBP – having failed at the range highs around the 0.8880/90 area the single currency looks set for another test lower, and on a break of 0.8800 could well look to test the 0.8750 area once more.
Yesterday’s close below the 55 day MA, now at 0.8826 increases the likelihood of this happening.
The major support remains at the 200 day MA now around the 0.8675/85 area. Only a close below the 200 day MA has the potential to retarget the May lows at 0.8610 and ultimately the trend line support at 0.8565 from the 2010 lows at 0.8065.

USDJPY – yesterday’s sharp move back towards 77.20 validated the view of another crack at the recent highs, but as before has lacked the conviction of a follow through move higher.
No change in overall view here as the market continues to find fairly solid support around the major lows around the 76.20/30 area, and while this holds we could well see further gains; however the lack of any rebound in US 10 year bond yields is limiting the dollar’s upside here.
If we take out 77.60 then the odds will have shifted further towards a test of the 55 day MA and bigger resistance level at 79.50/60.
Any move below the key lows could well see further US dollar losses towards 74.50.