Ratings agency Moody’s blindsided the markets late last night, with a raft of unexpected adjustments to the ratings of nine European countries, downgrading with a negative outlook, Spain, Italy and Portugal as well as three others, while putting France, Austria and the UK’s triple “A” ratings on a negative outlook. Both the euro and the pound dropped sharply as a result.

In the case of the UK the agency cites increased uncertainty regarding the pace of fiscal consolidation due to weaker growth prospects over the next few years, with risks skewed to the downside. The agency also put the Bank of England’s triple “A” rating on negative watch as well, to add insult to injury.

The UK was set to be under the spotlight today in any case with the latest January CPI numbers due to be released after last week’s decision by the Bank of England to boost the asset purchase scheme by another £50bn.

It is widely expected that inflation will fall back sharply now that last years VAT hike drops out of the annualised figure, with expectations that the rate will fall from 4.2% to 3.6%.

Retail prices are also expected to fall back from 4.8% to 4.1% and reinforce the Bank of England’s belief that inflation will continue to drop sharply in the coming months, while also increasing speculation that the current loose monetary policy will continue throughout 2012.

In light of last nights downgrade blitz by Moody’s markets will soon be able to gauge the effects when Italy looks to sell €6bn of 2, 3 and 5 year BTP’s at a time when bond yields across Europe had been falling sharply, due to the LTRO’s. Spain is also looking to sell some short term T-Bills, while both Greece and Portugal look to publish their latest Q4 GDP numbers and they aren’t expected to be particularly good reading.

They say patience is a virtue but it is slowly becoming apparent that Europe’s is running out where Greece is concerned. There is widespread scepticism amongst EU policymakers that Greece will be able to meet its obligations with respect to the bailout program, certainly if last nights comments by Luxembourg Finance Minister Luc Frieden are anything to go by, where he openly talks about the prospect of a Greece default.

EU leaders are also waiting for Greek politicians to give a written commitment not to unpick the bailout terms in the event of a change of government in April, with Angela Merkel insisting that there could be no changes to the bailout terms. This seems unlikely given New Democracy leader Samaras’ comments at the weekend that after an election he would look at renegotiating the terms of the bailout. That does presuppose he becomes Prime Minister which is by no means a given when looking at the state of the current opinion polls.

In the meantime the latest Germany ZEW survey for February is set to continue to improve slowly from January’s -21.6 to -15 for economic sentiment, though Eurozone industrial production for December is set to slide 1.2%, from a flat reading in November.

The Bank of Japan surprised the markets overnight by easing monetary policy further in an attempt to weaken the yen. The Bank expanded its asset purchase program further by 10 trillion yen after its Q4 GDP showed a bigger drop than expected contracting as it did by 2.3% on an annualized basis.

US retail sales for January are expected to show a sharp rebound from December’s poor 0.1% rise with a rise of 0.7%.

EURUSD – yesterday’s inability to get above the 1.3300 level has seen the single currency drift back and break below trend line support at 1.3165 from the 1.2620 lows in January.
This move below the 1.3165 area has the potential to retarget the twin lows last week at 1.3025/30 area.
Only below 1.3020 retargets 1.2870/80.
The key level on the upside still remains at the 1.3330 area which is the 100 day MA, while behind that there is also the 1.3435 area which is the 50% retracement area of the same move.

GBPUSD – the cable continues to struggle and the break below the 1.5710/30 support area suggests we could see a deeper correction lower, towards 1.5600 and the 55 day moving average.
The resistance at the 200 day MA at 1.5938 remains the level preventing a move above 1.6000.

EURGBP – the 0.8340 level continues to act as support while remaining capped just above the 0.8400 level. The key level remains at the recent range highs so far this year at the 0.8420/30 area. A break could well see 0.8500 quite quickly.
The 0.8340 area needs to break on the downside to signal a return towards the January lows at 0.8220. It would require a break below the September 2010 lows at 0.8200/05, to target the 2010 lows at 0.8065.

USDJPY – the US dollar remains confined between the resistance at the 200 day MA at 78.10, and the support at the 76.50 area. The 200 day MA remains the key barrier to a US dollar turnaround towards 80.00.
The key support remains above the 76.50 level and expect to see further range trading in the absence of a break above the 200 day MA, with interim support also at 77.30.