Despite this week being a key week with respect to the UK economy with inflation, unemployment and retail sales data due out, the main focus is likely to be on the after effects of the decision by UK Prime Minister David Cameron to exercise Britain’s veto on the proposed changes to the EU treaty.

These changes, proposed by France and Germany were, it was felt, have had repercussions on the single market as well as on Britain’s fiscal sovereignty, given the proposals on the agenda with respect to a “Tobin tax” and other regulatory issues.

The political fall-out is likely to be minimal given that no party in the coalition wants an election at this time; however Friday’s events are likely to make for some spicy conversations around the cabinet table.

The bottom line to all this “noise” is whether or not Friday’s agreement was or is a “lousy compromise”.

First glance suggests, that is exactly what it is, and the only new measure agreed was the promise of €200bn of bilateral loans to the IMF to be used to rescue Italy, if needed.

The one changed dynamic is the isolation of Britain from the other 26 European nations as they pledge to try and pursue further fiscal harmonisation, outside of the strictures of the original treaty. How long that will last is anyone’s guess, and as such we could see further unravelling with respect to this agreement in the coming weeks.

It is hard to imagine that Ireland will give up its 12.5% corporation tax rate, and one can’t imagine Finland or Sweden being able to overcome their misgivings either, with the prospect of referendums being required.

As such the UK may not be isolated for long, despite the political mumblings to the contrary by various politicians past and present, with a lot of colourful metaphors being bandied about the UK’s fate; however that will be the least of anyone’s problems if the euro breaks up.

The reality is, due to the reluctance of Merkel and Sarkozy to show real leadership and deal with the real issues, and instead marginalise Britain to pursue a political agenda, the probability of a break up still remains a possible outcome.

As such the only difference between Friday and Monday is that “Merkozy” have cast Britain adrift, while they steam full tilt towards the iceberg.

Today’s auction of Italian and French bills will be a key barometer of market sentiment with respect to Friday’s events, while there will also be one eye on ratings agency Standard and Poor’s in the wake of last week’s events given its comments last week about updating its review on all European nations credit ratings, post summit. Moody\'s also this morning warned on the ratings of all EU sovereign nations reiterating its intention to revisit the ratings in the first quarter of 2012.

Greece also starts talks with the “troika” of its creditors today on a new bailout package while Italy’s three biggest unions stage a 4 hour strike in protest at the latest austerity measures.

EURUSD – despite attempts to retest the November lows at 1.3210 the single currency has found progress below 1.3300 difficult to sustain, prompting sharp rebounds on each occasion.
Further downside remains the preferred scenario and only a break back above the 1.3570 level and highs of the last three weeks would delay that.
The objective remains for a retest of the lows in October at 1.3150 on the way to the 1.3050 level, which is the 61.8% retracement level of the 1.1880/1.4940 up move. A break here would then target this year’s low at 1.2870.

GBPUSD – the failure to move beyond the 55 day MA at 1.5740 as well as this month’s high at 1.5780 is the main barrier to a move towards 1.5825 and 1.5900.
While below 1.5745 the pressure remains for a break lower towards the 1.5500 level as well as trend line support at 1.5470. This trend line support comes in from the post QE2 lows at 1.5270 while longer term support from the 2010 lows at 1.4230 comes in at 1.5405.

EURGBP – last week’s break below the 200 week MA at 0.8567 was the first time the single currency had closed below this key indicator since 3rd September 2007.
This should be the signal for further declines towards trend line support at 0.8385 from the October 2008 lows at 0.7695.
The risk still remains for squeezes back to the 0.8620 highs from last week, but as long as the single currency closes below the 200 week average further declines should follow.

USDJPY – the lack of any rally here is a concern with the US dollar pushing down below the 77.70 trend line support from the 75.30 post war lows. Only a move below the 77.20/30 level and 55 day MA area, would undermine this scenario, and risk a move lower that would see the next key support area around the 76.20/30 area, a break below of which opens up the lows at 75.30.The main target remains for a move towards trend line resistance at 78.80 from the 2007 highs at 124.15, on a break above the 78.30 level.