Yesterday’s speech by ECB President Draghi that the ECB could provide the “bridge towards a more stable future” if politicians were brave enough to walk over it, must be ringing a little hollow this morning after the events in Spain yesterday, which are likely to prompt a lower market open in Europe this morning as investors become unsettled at what appears to be unfolding. Anti-austerity protestors were embroiled in violent clashes with Spanish police in Madrid yesterday, as the government strove to agree new austerity measures for its 2013 budget, in the hope it can avoid having to ask for a bailout. Ratings agency Standard and Poor’s passed its judgment on the Spanish economy by downgrading its growth forecasts for 2013 from -0.8% to -1.4%. In a country that has an unemployment rate of 25% and a contracting economy it was a reminder, if any were needed, that Spain is swimming against the tide as it struggles to meet its obligations, and balance its budget. It can only be a matter of time before Spain is forced into a bailout request and it might need an external catalyst to provide it. This catalyst could well be in the form of ratings agency Moody’s if they follow through with a downgrade after the completion of its review of the country, which started in June. If it takes a similar view on the dynamics of the Spanish economy as S&P did yesterday then a downgrade could come any day now. If that wasn’t enough of a political problem for Spanish PM Rajoy, he also has a much bigger one in the form of Spain’s biggest region, Catalonia which announced that it would be holding elections on November 25th in what could be a referendum on independence from Madrid in defiance after the central government rejected the regions demands for greater powers over how their tax euros are spent. With other Spanish regions also looking for financial help the problems continue to pile up for Mr Rajoy, while across the border in Portugal the problems are just as bad with the government there having to make unpopular decisions with respect to further cuts, in the face of mounting opposition. Meanwhile in Greece a general strike of two of the country’s biggest union’s starts today in protest at the planned introduction of another €13.5bn of budget cuts, as Greek politicians haggle over where the axe should fall next. As for economic data the main items on the docket are Italian retail sales for August which are expected to show a decline of 0.1%, and German CPI data for September, which is expected to slip back from 2.2% to 2.1%. EURUSD – this morning’s breach of the 1.2890 level brings us closer to a retest of the 200 day MA at 1.2830. It needs a push below 1.2830 to retarget the 1.2650 level with key trend line support from the 1.2045 lows now at 1.2610. Pullbacks have so far stalled at trend line resistance from the 1.3175 highs earlier this month, now at 1.2950 as the euro struggles to rally The bigger resistance level remains from the 1.4940 highs at 1.3210 Only a move above 1.3240, targets 1.3495, the 50% retracement of the entire down move from 1.4940 to 1.2045. GBPUSD – cable continues to trade in the range between support at 1.6150 and the larger resistance at 1.6300/10. The risk remains for a move back towards 1.6050 despite the pounds resilience; with a move below 1.6050 suggesting a test of trend line support at 1.6025 from the August lows at 1.5490. It needs a move above resistance at 1.6305 to target a move towards 1.6590, last years August high. Only a break below 1.5860 has the potential to target 28th August lows at 1.5755. The long term trend line support lies at 1.5620 from the 1.5240 lows. EURGBP – yesterday’s dip below the 0.7950/60 cleared out a few stops before pulling back sharply in a nasty little bear trap. The momentum still argues for a test towards the 07880 level and trend line support from the 0.7755 lows at 0.7900. To restore upward momentum we need to see a bounce back through the 0.8050 area to retarget the highs two weeks ago. USDJPY – the inability to rally back through 78.00 keeps the pressure on for a move towards the lows earlier this month at 77.25. To stabilise in any meaningful way we need to take out trend line resistance at 79.15 from the 20 April highs at 81.80, as well as the 200 day MA at 79.30. The 200 day MA at 79.31 remains the main obstacle to a return towards the highs last month at 79.70.