As the debt talks in Greece grind relentlessly on and deadline after deadline is missed, words that would never have been uttered six months ago are beginning to gain currency in mainstream EU political circles.

The admission by European Commissioner Neelie Kroes, as well as the Dutch PM Mark Rutte, that the Eurozone would survive if Greece was forced out, let the cat out of the bag that just such a scenario had been discussed; despite President Barroso’s attempts to put the cat back in, by saying that “we want Greece in the euro”

The Greek Prime Minister Papademos continues to fight a thankless task in the face of strikes and protests as he tries to align the demands of the troika of lenders, his governmental political partners, and the Greek people.

A meeting with his fellow political leaders, originally planned for last night, has been postponed until later today after the Prime Minister met once again with EU officials to attempt to put the finishing touches on a new bailout plan.

Greek officials continue to brief that a final draft agreement is close, as Greek politician’s battle to preserve the viability of existing pension funds, amongst other contentious issues.

Assuming there is an agreement today EU finance ministers will meet on Thursday, according to the German finance minister, in order the Greek parliament can vote on them at the weekend.

At the same time there has, as yet, been no final deal with the private sector creditors, which needs to be completed by next Monday, 13th February for the paperwork to be in place in time for when the March 20th bond repayment comes due.

Across Europe, Portugal remains an interested observer, given its own problems, and in signs of trouble ahead the head of the largest trade union in Portugal pledged to push back against further austerity and get their own PSI agreement, despite EU leader’s insistence that Greece is a special case. Time will tell if that particular pledge goes the way of the fairies, just like all the previous ones.

As if to compound the problems in Europe, the economic data shows no sign of improving either after yesterday’s German industrial production data for December showed a sharp 2.9% drop. Today’s release of German December trade data is expected to show a fall in the surplus from €16.2bn to €13.7bn with exports set to show a 1% fall, not surprising given that southern Europe is one of its key export outlets.

Despite the headline fatigue with respect to Greece the single currency continues to squeeze higher as market optimism about an agreement builds, however the gains also have to be offset against the weakness of the US dollar after Fed Chairman Bernanke stuck to his gloomy FOMC script of last week and downplayed last Friday’s much improved jobs report, stating that the 8.3% unemployment number understated the weakness in the US jobs market.

These cautious comments once again suggest that the Fed remains unconvinced of the sustainability of the recent improvement in economic data and as such raised expectations about the likelihood of further easing in the near future, despite the political difficulty it could find itself in if it were to do so.

EURUSD – yesterday’s close above 1.3250, last week’s highs and the 38.2% Fibonacci retracement level of the down move from the October highs at 1.4250 to the recent lows at 1.2610, suggests we could well be set for a move towards 1.3340 initially and the 55 day MA while behind that there is also the 1.3435 area which is the 50% retracement area of the same move.
It needs a move back below the 1.3200 area to retarget the twin lows this week at 1.3025/30 area.
Only below 1.3020 retargets 1.2870/80.

GBPUSD – the pound continues to close in on the 200 day MA, now at 1.5940, with each dip lower being met by solid buying interest, as traders continue to try and pick a top in what has been a solid rally since the 1.5240 lows in January. The pound has posted 15 up days in the last 17 and could retest the 1.6000 level which would be a 50% retracement from last years high at 1.6745 from this years low at 1.5240.
The pound now has trend line support from the 1.5240 lows at 1.5800, while to spark a move lower we would expect to see a break 1.5730/40 to retarget last weeks low at 1.5650.

EURGBP – as is its wont the euro pulled back sharply from its lows earlier this week and has managed to make progress above the 0.8340 level, which shifts the likelihood of a broader move towards the 55 day MA at 0.8390, while above the 0.8320 level.
The onus remains for a move lower while below the larger resistance level at the highs this year around 0.8420.
The January lows at 0.8220 remain the next target, but it would require a break below the September 2010 lows at 0.8200/05, to target the 2010 lows at 0.8065.

USDJPY – the dollar has so far managed to hold above the 76.50 level and make a new one week high at 76.95 yesterday. As US 10 year yields continue to rebound the dollar should remain underpinned here, but they need to get back above 2% to keep the momentum going.
If the US dollar can hold above 76.20 then we could well see a stabilisation and a retest of last month’s highs.
The 200 day MA at 78.15 remains the key barrier to a US dollar turnaround after last month’s failure at that level.