Going into Friday’s US employment report there was certainly a great deal of concern amongst investors that a good jobs number could well reinforce the narrative that some form of Fed tightening could well come sooner rather than later, particularly given last week’s unexpectedly strong US Q2 GDP number, and surprisingly strong employment cost index rise. These positive numbers pushed US two year yields to their highest levels in three years. These gains in yields proved to be somewhat short-lived after a slightly disappointing jobs number and a weaker than expected average wage growth figure prompted a sharp reversal. While borrowing costs eased, stock markets were unable to gain any significant support as they continued their nervous slide as various other factors served to keep markets on the back foot. Investors appear to be now starting to weigh up, the knock on effects of the new Russian sanctions, the potential for possible countermeasures, and any spill over onto the strength of company earnings, while ongoing unrest in Iraq and Libya is also raising concerns. When combined with concerns about the health of Europe’s banking sector, as well as the weakness of all of Europe’s main economies it’s not hard to understand why some semblance of reality has started to feed into investor perceptions about the economic risks Europe still has to confront with respect to its faltering economies. If any reminder were needed of the major surgery that Europe still has to undergo with respect to its economic and banking problems, then the travails of troubled Portuguese bank Banco Espirito Santo are a sobering reminder as the latest bailout of a European bank was announced late last night. The troubled Portuguese lender will be split into a good bank and bad bank with up to €4.9bn set to be pumped into it to keep it afloat, after last week’s larger than expected €3.6bn loss, using the proceeds left over from Portugal’s loan funds from its EU and IMF bailout. We are told that this problem is likely to remain a fairly contained one, but if anyone truly believes that then they are truly kidding themselves. With the European Central Banks (AQR) Asset Quality Review well under way, this bail out or recapitalisation, is unlikely to be the last, if these EU mandated stress tests are to be treated as in any way credible. Having come off such a turbulent and negative week we look set to begin the new week here in Europe on the back foot once again with geopolitical risk once again set to be the main concern as events in Iraq and Libya took a turn for the worse over the weekend, and could well cause oil prices once again to drift higher. Given the economic weakness being seen in Europe much of this week’s focus is likely to be on Thursday’s ECB meeting on monetary policy after last week’s weak inflation number. Any prospect of further action on monetary policy remains unlikely ahead of October’s AQR, irrespective of this week’s services PMI data from Germany, France, Italy and Spain, which is likely to be fairly similar to last week’s manufacturing numbers with France set to underperform again. We also have the latest UK construction PMI data for July which is expected to weaken slightly after a somewhat disappointing manufacturing number on Friday. A slowdown from 62.6 to 62.1 is expected, still not too shabby considering what is happening elsewhere in Europe. EURUSD – we saw quite a strong rebound off the 100 week MA last week at 1.3355 and could be susceptible to a bit of a short squeeze after Friday’s US dollar sell-off. If we get back above resistance at the previous lows at 1.3475, we could see a move to retarget the 1.3570 level and then on to 1.3640. GBPUSD – having undergone its worst weekly fall since October last year the pound broke below its 100 day MA at 1.6845 which could well trigger further weakness towards the 1.6780 level initially and then 1.6700. Any rebounds now need to get back through 1.6920 to stabilise in the short term and argue for a retest of 1.7000. EURGBP – the euro continues to squeeze higher breaking above the trend line from the March highs at 0.7980. This break higher could well see a test of the 0.8000 level and if broken target a deeper pullback towards 0.8070, prompting an even larger pullback towards 0.8200. USDJPY – having failed at 103.00/10 yet again last week the risk of a pullback remains, particularly given that US yields slipped back sharply on Friday. There is nothing to suggest though that we won’t continue to trade within the broad range that we’ve been in over the last six months. We have resistance at 103.00, and support at 101.80. CMC Markets is an execution only provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.