The political theatre playing out in Europe continues to drive investors towards the exits with policymakers adopting an increasingly tough line with respect to Greece as bailout fatigue in northern Europe starts to manifest itself alongside austerity fatigue in southern Europe.

The G7 meeting at the weekend not unexpectedly failed to deliver anything other than words with the communiqué saying that it would take “all necessary actions to ensure the resilience of banking systems and financial markets.”

The resignation at the end of last week of Germany’s Jurgen Stark from the ECB board over the ECB bond buying program is one example unease in Germany with respect to the final bill of this crisis.

What would never have been contemplated a few months ago is now being openly discussed, as talk gathers pace of Germany looking towards a plan B to recapitalise and protect its banks in the event of a Greek default.

Increasingly tough talk from other European leaders towards Greece in the face of political tension from their own electorates has raised further fears that Greece will be unable, or unwilling to meet the requirements of the next bailout tranche, and thus lose funding, and ultimately default on its debt.

This could have significant repercussions for the whole European banking system starting with the French banks, who are the most vulnerable to further weakness.

Expectations are rising that ratings agency Moody’s could well cut the ratings of the three biggest French banks as early as this week, due to their exposure to Greek debt, after it put them on review in June.

These fears are likely to manifest themselves in the form of further strains within the whole European banking system, as banks remain reluctant to lend to each other in a possible repeat of the 2008 Lehman crisis.

Despite their being no formal mechanism for a country to leave the euro the Dutch Prime Minister last week suggested that countries not prepared to be placed into administration and take measures towards fiscal sustainability, should leave the euro, a view starting to gain traction within German political circles as well, with calls increasing within the German government for Greece to be pushed out of the euro zone, with a default now only seeming to be a matter of time, after economy minister Philipp Roesler suggesting that the “orderly default” option could no longer be ruled out.

EURUSD – Friday’s break out was quite surprising in its speed, closing below all three technical support levels at the 200 day and 200 week MA.
The bias now turns profoundly negative having also closed below 1.3660 which is 61.8% retracement of the entire up move from the January lows at 1.2870 to the 1.4940 highs.
The next areas of support come in between 1.3360 and 1.3405, with 1.3405 being 50% retracement of the entire rally off the 1.1880 lows in 2010 to the highs this year at 1.4940. 1.3050 is the 61.8% retracement of the same move.
Pullbacks should be confined to 1.3830 and behind that at 1.4020.
The 200 week MA should now act as a major resistance at 1.4025 on a weekly close.

GBPUSD – the 1.5780 level remains a key support level for cable being that it is the July lows but also 38.2% retracement of the 2010 lows at 1.4230 to the highs this year at 1.6745. The reaction here will be important to the future direction of the pound.
A break through this level targets the 1.5485 level which is the 50% retracement of the same move.
The pound continues to remain oversold and any rebound could well see a rebound back towards Thursday’s highs at 1.6085. In the interim there should selling interest around 1.5920.

EURGBP – Friday saw the 200 day MA at 0.8690 finally give way as the market looks to test below the trend line support at 0.8575 from the 2010 lows at 0.8065. This 0.8575 level also coincides with the 50% retracement of the entire up move from the lows at 0.8065 to the peaks at 0.9085 this year
.A sustained break here targets 0.8455 which is the 61.8% level. Any pullbacks should find the 0.8700 area tough to break through given it is the 200 day MA resistance.

USDJPY –Friday’s move higher saw the dollar push slightly above the 77.60/70 highs but it continues to falter just shy of the 55 day MA just above the 78.00 level.
Weakness in US treasury yields is constraining the upside in the yen here and it really needs a close above the 55 day MA to push on towards the bigger resistance level at 79.50/60.
Any move below the key lows at 76.20/30 could well see further US dollar losses towards 74.50.