For all the sound and fury of Friday’s relief rally in the single currency, and the surge higher in equity markets, investors seem to be overlooking one important fact about Europe’s economy, and that is the lack of growth and the continued pressure on economic activity, caused by a largely insolvent banking system. These concerns have raised expectations of further easing later this week from the in an attempt to boost economic activity. The ECB is expected to cut rates below the current 1%, while the Bank of England is expected to at the very least add another £50bn of asset purchases to the £325bn already done. While there may be some relief that on the face of it Germany’s acquiescence with respect to bank’s tapping the bailout funds directly, has eased the pressure on sovereign balance sheets, nothing agreed at last week’s EU summit is likely to alter the fact that economic activity is contracting at an alarming rate in Europe. This is due to the reluctance of banks to perform the function they are supposed to fulfil, namely lend to businesses and each other. To reinforce this lack of economic activity announced at the weekend that the Spanish economy would contract even more in Q2 than it did in Q1. Furthermore Germany’s climb-down may have ramifications inside the country as legal challenges start piling up with respect to the role Germany will play in the ESM, as well as the legality of the fiscal pact. The German constitutional court is due to rule on these issues after the German parliament voted them through at the weekend. At the weekend on the official measure continued to stagnate from 50.4 previously to 50.2. On the HSBC measure the story wasn’t that much better, coming in at 48.2, only improving slightly from the preliminary 48.1 figure posted earlier in June, but worse than May’s 48.4 and a seven month low. numbers for June for Spain, Italy, France, Germany, and the Eurozone as a whole, are expected to deteriorate further. Spain is expected to come in at 41.3, Italy 44.6, France 45.3, Germany 44.7, and the Eurozone 44.8. At the same time May is expected to rise to 10.3% from 10.2% while Eurozone unemployment is expected to increase further from 11% to 11.1%, another record high. Things aren’t expected to be much better for the only expected to improve marginally from May’s shock fall to 45.9, with a slight improvement to 46.5. With concerns remaining about the remaining evenly balanced after the Fed’s decision not to embark on further QE, particular focus will be on today’s ISM Manufacturing numbers with further weakness expected, but only a slight decline from 53.5 in May to 52 in June, still in expansion territory. – Friday’s sharp move higher once again suggests the possibility that we remain vulnerable to further short squeezes. The failure to take out the previous highs at 1.2750 is a warning sign that the single currency will continue to struggle at higher levels. The 1.2750 level also coincides with a number of other key resistance levels including the 55 day MA at 1.2775 and 50% retracement level of the 1.3285/1.2290 down move at 1.2790. Intraday support now lies at 1.2580 and 1.2420 while the primary objective remains unchanged at the 2010 post first Greek bailout lows at 1.1880. – even though we broke above the trend line from the 1.6305 highs at 1.5695 the key resistance on a closing basis remains the 200 day MA at 1.5755, not forgetting the 50% retracement of the 1.6305/1.5270 down move at 1.5785. The key support remains at the 1.5480 level, 14th and 15th June lows which we failed to get below last week. Only a break below here retargets the June low at 1.5270. Only a close beyond 1.5755 the 200 day MA, targets 1.5910, which would be the 61.8% retracement of the move mentioned earlier. – pullbacks here have continued to remain below the 55 day MA at 0.8078 and trend line resistance from the highs this year at 0.8505 at 0.8090. As long as any pullbacks stay below then further euro losses are the preferred scenario, otherwise we’re looking at resistance at the 0.8150 area. The area below the 0.8000 level seems to be offering quite a bit of support at the moment; however the key level remains the 0.7950 area. Once below 0.7950 we could well see a move towards 0.7845 and the November 2008 lows. – the choppy range continues to play out within the cloud with the top at 80.45 and the support above the 200 day MA at 78.80. We also have trend line support at 79.20/30 from the 4th June lows at 78.00. To reiterate we need a weekly close above 80.50 to reassure about further upside.