Economic data continues to act as a by-product to the over arching reach of the sovereign debt crisis in Europe, as optimism that EU leaders might finally be taking steps to tackle the crisis saw equity markets and the single currency pull back some ground.

Disappointing German IFO data for September was shrugged off yesterday as markets chose to focus on the change of emphasis from EU leaders with respect to the problems in Europe.

Talk out of Europe about the consideration of bank recapitalisations, a 50% Greek default and an increase of leveraging up of the bailout fund (EFSF) has encouraged, but numerous obstacles remain with the German constitutional court being one of the biggest, next to the ECB.

Andreas Vosskuhle, head of the constitutional court, said politicians do not have the legal authority to make any agreements that violate or impinge on German national or fiscal sovereignty, and any leveraging up or increasing the EFSF would do that, and any such measures, if being considered, must be put to a referendum of the people.

This intervention, coming as it does ahead of a key vote on the EFSF in the Bundestag on Thursday, could well make matters tricky for getting the vote passed.

With this in mind uncertainty will undoubtedly remain the predominant sentiment, not helped by mixed messages from ECB officials with Ewald Nowotny suggesting a rate cut couldn’t be ruled out at the next meeting; only for this to be rubbished by his fellow ECB member and colleague Yves Mersch.

Spanish and Italian bond short term bond auctions later this morning are also expected to attract scrutiny given the recent rise in yields.

In the UK the pound has managed to pare back some of its recent losses despite concerns that the Bank of England could well be set to embark on a fresh round of asset purchases, as economic data continues to show weakness.

Yesterday saw new MPC member Ben Broadbent indicate that he almost considered voting for more QE at the last meeting of the MPC. This puts him much closer to current and only MPC dove and QE advocate Adam Posen who is set to speak later this morning in Berlin, and who will no doubt go onto make his case again.

Analysts have been speculating that further QE could well start as soon as next week. This seems unlikely given the current mathematics on the committee, but we could well see additional members move into Posen’s camp without getting the required majority. We wouldn’t know how many though until the published minutes later on in the month.

Today’s CBI reported sales for September is expected to show further weakness from August’s -14, declining to -15 as consumers keep their hands in their pockets amidst all the uncertainty in the UK and Europe.n the US, markets are not only putting to one side more disappointing housing data from yesterday, but also the possibility of another government shutdown on Friday, as once again partisan politics and rows over disaster aid, threatens to derail a bill that would keep the US government funded until November 18th, as the fiscal year comes to an end at the end of September.

US consumer confidence for September is expected to make a minor comeback from August’s surprise plunge from 59 in July to 44, with expectations for a recovery to 46.5.

EURUSD – despite a marginal new low of 1.3365 the single currency failed to close below the 50% Fibonacci retracement level at 1.3405 of the entire rally off the 1.1880 lows in 2010 to the highs this year at 1.4940. It needs a close below 1.3400 to target 1.3050 which is the 61.8% retracement of the same move. The continued failure to break this support area could well see a pullback in the medium term towards 1.3670.

GBPUSD – the break above 1.5500 yesterday and the bullish candle on Friday keeps the likelihood of a test towards 1.5640 as a distinct possibility. A move beyond 1.5640 has the potential to revisit 1.5780.
The support at 1.5330 remains the main obstacle to further declines in the longer term towards 1.5190 in the near term which remains the probable longer term outcome, given that the 50 day MA is likely to cross below the 200 day MA in the next few days, and in the process post a “death cross” reversal signal.

EURGBP – the cross continues to find the air a little thin anywhere near the 0.8800 level, with trend line resistance from the 0.9085 highs acting as resistance. The bias remains for further losses while below this resistance and the recent range highs at 0.8790.
The single currency’s break below support at 0.8700 saw a test below 0.8670 to hit 0.8650 before rebounding. The recent range lows at 0.8535 remains the likely next target while below 0.8720.

USDJPY – in what is something akin to watching paint dry the inability to rally and weak US bond yields keeps the pressure on the US dollar, however the base continues to remain intact despite the yen making 10 year highs against the euro.
As such the bias remains alive for the prospects of further gains, on a break above 77.20.
Any move below the key lows at 76.20/30 could well see further US dollar losses towards 74.50.