For quite some time now Europe’s leaders have pretended that the only solution to the Eurozone crisis was more austerity, completely blind to the growing voter discontent in Europe. This weekend’s events in Greece, France as well as Germany should have dispelled that notion once and for all, as voters delivered a bloody nose to the incumbent governments and also brought closer the prospect of a clash between the German approach to how Europe should go in the future, and pretty much everyone else’s.

There was a sense that EU leaders knew what was coming when EU commissioner Olli Rehn suggested at the end of last week, in a departure from the most recent rhetoric, that the EU had scope to ease its tough fiscal rules. “The stability and growth pact is not stupid” he stated, going on to say that there remained “considerable scope for judgment when it comes to its application”.

Be that as it may there appears to be considerable scope for further uncertainty going forward in Greece especially, where forming a stable government looks a massive ask and the likelihood of another election in a month or so looks fairly certain.

Irrespective of what happens in the coming weeks it looks increasingly impossible that Greece will be able to implement the types of reforms asked of it in the face of such voter opposition, increasing the likelihood that the country will have to leave the euro.

The backlash against austerity also brought in a new French President, Francois Hollande, who wants a more growth friendly approach to Europe as well as a renegotiation of the fiscal compact. Even so he may not be able to deliver on a lot of his election promises if recent comments by outgoing Eurogroup President Jean Claude Juncker are anything to go by, stating last night that Paris cannot renegotiate the fiscal compact, potentially putting the new French President on a collision course with both the EU and Germany.

German chancellor Angela Merkel has steadfastly refused to countenance a renegotiation of the fiscal compact, and she will be even less inclined to do so in the face of her party’s setback in a regional election at the weekend, especially with another election in North Rhineland Westphalia due next week.

Meanwhile in Spain it would appear that confidence in the banking system continues to deteriorate as the Spanish government looks set to look again at the creation of the “bad bank” idea.
As the costs of distressed loans rises there is talk that Bankia could see billions of euros injected into it to stave off a collapse.

The reality remains that, behind all the rhetoric about austerity and a more growth friendly approach, Europe has entered another phase of political fudge and uncertainty.

EURUSD – we finally got the break we were looking for towards the downside with the break of the 1.3055 triangle support. A close below the February lows at 1.2975 has the potential to open up the lows this year at 1.2630.
Only a move back above the gap at 1.3085 has the potential to stabilise in the short term and target a retest of 1.3200.
The break of the triangle now suggests we could well signal a 500 point move as a minimum price objective, which targets 1.2630 we need to see a concerted break below 1.2975.

GBPUSD – the pound continues to resist the pull of downward pressure that is weighing on the single currency though it did slide below 1.6160, which could see it slip towards support at 1.6050 which if broken would then argue for a test towards the trend line support at 1.5960 from the January lows at 1.5235.
Resistance remains at the trend line resistance at 1.6320 from the 2011 highs at 1.6750.

EURGBP – the break below the 2010 lows at 0.8065 reinforces the negative outlook for the single currency and now opens up the risk of further losses towards 0.7700 over the medium term. In the short term expect further choppiness with interim support around the 0.8020 level which equates the June and July 2008 peaks.
To stabilise we would need to see a move back above 0.8140, to retarget resistance at 0.8220 and trend line resistance at 0.8260 from the February highs at 0.8505.

USDJPY – the dollar does appear to be carving out a base around 79.70, however the failure to get back above 80.45 is a concern and this keeps the risk skewed to the downside.
A failure to get above the weekly cloud resistance keeps the current momentum skewed towards the downside. A break below 79.70 would then target 79.20 initially on the way to 78.35 and the 200 day MA.
The 80.42 cloud line should now act as a resistance level and for the dollar to stabilise we would need to see a close back above this key level.