Last week’s sharp declines in the euro have been blamed on the expectation that the ECB will either cut rates this week, or signal its intention to loosen policy further in the coming weeks. How this particular policy manifests itself will be extremely important in how markets react in the coming days after last week’s European economic data painted a picture of falling prices and rising record unemployment, particularly in Italy and Spain. Quite why it has taken markets so long to wake up to this particular reality is anyone’s guess, given that the direction of travel has been fairly clear for some time. This expectation of a looser policy is set to see European markets open higher this morning, though this expectation could well be tempered by uncertainty about the timing of Fed policy after better than expected October Chicago PMI and ISM numbers at the back end of last week. Will this week’s delayed US payrolls data clarify or confuse the picture further? ECB President Mario Draghi has consistently pledged that the ECB will do whatever it takes to preserve the euro, and this has been enough since July last year to hold the line. This relative calm has had the unintentional effect of driving the euro higher, thus exacerbating the economic problems in Europe. While words and pledges can go so far, at some point markets may decide to test the central banks resolve. That resolve could well be tested later this week, particularly if this week’s economic data from Europe confirms that the recent recovery in Europe is at risk of petering out. It remains unlikely that the ECB will do anything on rates this week, but Draghi could well signal some form of action in December at this week’s press conference. One thing is certain, irrespective of what the ECB does later this week, cutting rates or another LTRO won’t solve the problems in Europe. We are already seeing European banks reining back on corporate lending and increasing their exposure to sovereign debt in a complete reverse of what policymakers would like them to do. To help resolve the problems in Europe, policymakers need to sort out the banks, which means whatever the ECB does this week will be tantamount to slapping a band-aid on a gaping wound, unless politicians throughout Europe strive to move past their own narrow national self-interest. Today we will be getting the final October manufacturing PMI’s from France, Germany, Italy, Spain and the wider euro area. There shouldn’t be too many surprises from this particular dataset given last week’s preliminary readings, with France expected to be confirmed at 49.4, Germany at 51.5, while Italy is expected to show a small increase to 51 from 50.8, while Spain is expected to come in at 51. In the UK, having got a fairly upbeat set of manufacturing PMI’s for October on Friday, suggesting that Q4 for the UK economy is starting off in pretty much the same way that Q3 ended, on a positive note. We can also expect a similarly upbeat construction PMI number of 58.8, just below the September 58.9. EURUSD – last week’s late euro plunge has given us a bearish engulfing week and as such could well open up another 500 point decline in the coming weeks. A break below 1.3450 could well be the first signal this scenario could be about to unfold. For now we remain extremely oversold and as such we could see pullbacks towards 1.3710, which was last week’s initial trigger point for the move lower. The speed of the down move also suggests we could well have seen the top in the short to medium term with a bearish weekly close suggesting we could well see a move towards 1.3200 in the coming weeks. GBPUSD – the double top support remains at 1.5890/00 and while above this the potential for a rebound remains high. On the upside the 1.6110 level remains the key resistance to mitigate the downside bias. A break below 1.5900 has the potential to target a move towards 1.5750. EURGBP – the euro continues to chop against the pound with key support remaining at the 0.8420 level and four week lows. While above here squeezes back towards the 0.8520 remain a risk. A move through 0.8420 retargets the October lows at 0.8330. USDJPY – trend line resistance at 99.15 from the May highs at 103.75 remains the key obstacle to a move back through the 100 level. Support remains just below the 200 day MA at 97.45 at 97.20 trend line support from the 25th Feb lows. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.