Yesterday’s action by the ECB in doling out another €530bn in cheap money, making a total of over €1trn in 3 months, may well have bought some time for European leaders in averting a credit crunch in Europe, but it will all be for nought if Europe’s’ policymakers waste the opportunity to make use of it.

Throwing money at a solvency problem will not solve the issues underlying it, and a lack of growth in the European economy due to an uncompetitive exchange rate and fiscal austerity, merely delays a messy outcome rather than preventing it.

Today’s final February European manufacturing PMI’s are a timely reminder to European leaders of the problems facing an economy firmly in the doldrums, with Italian PMI expected to come in at 47, while French and German PMI are expected to remain stagnant at around 50.1, and the broader Eurozone measure is expected to stay at 49.

Eurozone unemployment for January isn’t expected to offer much cheer either, remaining at 10.4%, though there is a chance it could increase given recent rises in job losses across Southern Europe.

The start of today’s EU summit is therefore a good opportunity for Europe’s leaders to look at policies to boost growth and employment and send positive signals to the markets that they are committed towards those goals.

They are not expected to discuss matters relating to increasing the size of the ESM, which Germany is currently opposed to and not currently willing to entertain.

One other meeting that will be of interest is the International Swaps and Derivatives Association (ISDA) decision over whether Greek CDS insurance should pay out now that retrospective collective action clauses have been inserted in Greek bonds.

In the UK the pound bounced back strongly, crushing the euro after Mervyn King suggested that it was unlikely that the Bank would extend its QE program any further, while yesterday’s better than expected economic data suggested that the recent recovery in the UK economy was continuing.

Later this morning the health of the manufacturing sector comes back under the microscope with the latest manufacturing PMI data for February. January saw a surprise jump back into expansion to 52.1, and February is broadly expected to hold onto that recovery, slipping ever so slightly to 52.

In the US yesterday’s Bernanke testimony saw markets slip back as the Fed chairman played down the prospect of further QE in the near term, expressing surprise at the recent improvement in the jobs market, and suggesting that gas prices could push inflation higher.

Today’s weekly jobless claims are expected to remain around the 350k mark, while the latest ISM manufacturing data is expected to continue to improve to 54.6 from 54.1. The prices paid component will be of particular interest given Bernanke’s comments on inflation yesterday with an expectation that they will rise to 57.6, from 55.5.

Chinese manufacturing PMI for February released overnight didn’t ease concerns about the state of the Chinese economy despite coming in slightly better than expected. Official PMI data showed an improvement from 50.5 to 51, but the HSBC measure still stayed on contraction territory, though it also improved from 48.8 to 49.6, but new orders remained weak.

EURUSD – the failure to take out the 1.3490 level yesterday keeps the bearish scenario indicated by our bearish candle on Monday intact. Yesterday’s bearish candle also reinforces the bearish view.
Only above the 1.3490 level negates yesterdays bearish set up and argues 1.3630.
The move lower now needs to hold above support between 1.3300 and 1.3320 which had until recently been a solid top, for a bounce back towards this week’s highs. Only a move back below here argues for a move back down to 1.3180, and then the 1.3000 level.

GBPUSD – yesterday’s close above the 200 day MA at 1.5905 and subsequent move to 1.5990 supports the view for a move towards 1.6080. The 1.5900 level should now act as support in the short term. A close back below 1.5900 would re-target the downside and reopen the 1.5820 and 1.5720 levels while the double support at the 55 day MA and February lows at 1.5645 is a key level.

EURGBP – the euro got pulverised yesterday after failing to breach the 0.8500 level and subsequently dropping through the 0.8420/30 support level and old range highs.
The move below the 0.8400 level and previous highs opens up a retest of the old pivot at 0.8340, while a move below that retargets the 0.8270/80 range lows.

USDJPY – the weekly close near or above the Ichimoku cloud resistance at 81.00 remains on the cards after yesterday’s strong rebound.
The 82.85 area remains the next target being the 38.2% retracement of the entire down move from the 95.00 highs to the all time lows at 75.30.
This week low at 80.00 remains a key support level, though even a drop to 79.20 wouldn’t damage the current upward momentum but we need to see a close above the weekly Ichimoku cloud resistance at 81.00 to reinforce the case for further gains.
Below 79.20 argues for a deeper move towards the 78.20 level, and undermines the bullish scenario.