The fluidity of the situation in Europe was aptly illustrated last night in the space of a fraught sixty minutes with stocks rallying sharply on reports that European finance ministers were examining ways of co-ordinating large scale recapitalisations of banks on a local level in an attempt to convince markets that governments would do all they could to safeguard and support the European banking sector.

Just as they market had begun to digest that little nugget, ratings agency Moody’s with impeccable timing finally delivered on its ratings downgrade for Italy, downgrading them three notches to A2, with a negative outlook, citing increased risk in long term funding as well as increased downside risks to economic growth and to fiscal consolidation.

In an interesting side bar to that banking story the undertaking by France and Belgium to create a bad bank for Dexia and guarantee the loans of the ailing Franco-Belgian lender could well have ramifications for the French triple "A" credit rating, which until recently had been under scrutiny; given that France\'s contingent liabilities could well increase, in the event of a restructuring.

In any case the single currency pulled back from nine month lows yesterday after ECB president Trichet remained fairly inscrutable about a possible rate cut later this week, while Fed chairman Bernanke indicated that he might be prepared to consider further stimulus if the economy warranted it.

Later this morning markets will be looking at the key UK services PMI data for September, which is expected to slip back from August’s 51.1 to 50.6. There is a worry given yesterday’s sharper than expected drop in construction PMI that services could well be just as weak, and a weak number could well prompt speculation about what the Bank of England will do at tomorrows rate setting meeting.

UK Q2 GDP is also expected to be reaffirmed at 0.2% rise, which equates to a 0.7% rise, year on year.

Back in Europe euro zone retail sales for September are expected to slip back 0.3%, however given last weeks horrible German numbers, where they slid 2.9%, it wouldn’t be a surprise if this number came in much worse than expected.

In the US yesterday’s speech by Bernanke didn’t offer much in the way of anything new apart from the same line that the Fed stands ready to support the economy if needed. With that in mind the Fed chairman will be hoping that today’s ADP payrolls number for September, shows some good jobs growth with expectations of a rise of 76k, down slightly from August’s 91k gain.

Services ISM for September is also due out with expectations of a slight decline to 52.8 from August’s 53.3.

EURUSD – a nine month low at 1.3150 provoked a sharp rebound for the single currency which could well extend back towards the 1.3410 area which was the 50% retracement level of the entire up move from 1.1880/1.4940.
The longer term objective remains 1.3050 which is the 61.8% retracement level of the same move, however we could well see a pause now given the sharpness of the recent declines.
Only a close back above 1.3400 would retarget a pullback towards 1.3500 and even 1.3700, the recent range highs.
Longer term the objective remains for a move towards 1.3000 and this years low at 1.2870.

GBPUSD – the failure to take out the previous lows at 1.5330 saw the cable rally strongly yesterday, but we need to get back above 1.5520 to stabilise and target a retest of the resistance around the 1.5700 level. In the longer term a move towards 1.5190 remains the probable longer term outcome. The 1.5190 level is the 61.8% retracement of the entire up move from the 2010 lows at 1.4230 to 1.6745.
A sustained break above 1.5710 could well see the 1.5780 level and even 1.5820, which would be 38.2% retracement of the decline from the August highs at 1.6618 to the recent lows at 1.5330.

EURGBP – the double support and tweezers bottom at 0.8530 did indeed prompt a rebound, beyond 0.8600 all the way to 0.8650 as a short covering rally took hold. The close back above 0.8575 keeps the current range trading environment intact and delays the prospect of a move towards 0.8455 for now. We could well see a further rally back towards 0.8700 in the next 12 hours especially if the ECB holds rates today.
Support should now come in around the 0.8580 area.

USDJPY – the US dollar remains stuck in its range of 76.20/77.20 as US treasury yields keep a lid on any upside progress while concerns about BoJ intervention keep a floor around the 76.00 level.
The bias remains for further gains on a break of 77.20 level towards 77.80.
Any move below the key lows at 76.00/30 could well see further US dollar losses towards 74.50.