If concerns about Greece weren’t enough for the market to digest this week ratings agency Standard and Poor’s shifted the spotlight back onto Italy late last night, as it beat rival agency Moody’s to the punch and downgraded Italy’s sovereign rating by one notch to A/A-1, with a negative outlook, citing weakening growth prospects and a fragile political environment.

Even though last night’s conference call between the troika and the Greek government ended with an air of optimism about it, with reports of some sort of deal being close, the early optimism remains tempered by the admission that “some work still needs to be done”, according to an unnamed official.

The call is set to resume today on agreement on some measures with respect to the 2011 and 2012 budgets needing to be quantified.

Also weighing on sentiment was a story in the Greek newspaper Kathimeri suggesting that the Greek Prime Minister might be minded to call a referendum on its continued membership of the euro, which if true would throw a whole new variable into the mix.

Whether this story is fact or fiction is open to question given the lack of a verifiable source, however it could well tap into the public mood in Greece given the opposition to the various austerity measures at a local level.

In the wake of concern about economic conditions in Germany and the recent slowdown in economic activity the latest German ZEW economic sentiment survey for September is expected to show further deterioration from August’s -37.6 reading to -45.

President Obama’s jobs speech yesterday predictably got a rather dismissive reaction from Republicans as he pledged around $4trn worth of spending cuts in an attempt to put clear blue water between him and them on deficit reduction, with an undertaking to reform Medicaid, and to make some cuts to Medicare. Around $1.5trn of the measures will come from increasing the tax burden on the US’s richest citizens. The President pledged to send the proposals to the Joint Committee on Deficit Reduction, which was set up in the past month as part of the deal on the debt ceiling, which agreed to cut the deficit by $1 trillion.

EURUSD – the single currency seems to be struggling to push below 1.3600 in the short term seeing a sharp rebound yesterday, however the low last week around 1.3500 remains the key obstacle to further losses in the short term. Until such time as we see a break of this 1.3500 level the single currency will remain susceptible to sharp rebounds, back towards 1.3800 and Friday’s close.
The next target, on a break of 1.3500, remains 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.

GBPUSD – yesterday saw the pound make an 8 month low against the US dollar at 1.5635, before rebounding, however it would need a move back beyond 1.5780 to target a deeper move back towards 1.5900.
The pound looks a touch oversold on the 4 hourly charts and despite yesterday’s lows we could well see a rebound at some point, which could well be triggered by a close beyond 1.5780.
It still feels like we could well get further losses towards the 1.5485 level which is the 50% retracement of the 1.4230/1.6745 up move, but we could get a sharp short squeeze first.

EURGBP – the single currency continues to trade broadly within its recent range, pushing briefly below the 200 day MA at 0.8702 before rebounding yesterday.
This failure keeps the possibility of a retest of last weeks highs at 0.8790 and the 55 day MA.
The bias still remains for a test back towards the lows at 0.8530, and then on towards 0.8450, but it could well take a little longer to unfold.

USDJPY –another failed attempt to break below the key 76.20/30 support area, keeps the prospects of further gains intact.
As long as we can hold above the 76.20/30 area a bounce remains the preferred option on a break through the 55 day MA, just above the 77.90 level.ontinued weakness in US 10 year treasury yields is constraining the upside in the yen here. Any move below the key lows at 76.20/30 could well see further US dollar losses towards 74.50.