Good morning from Madrid As we enter the third day of the shutdown of the US government the various positions seem as inextricably entrenched as ever. On the plus side at least we don’t have to worry about the soap opera playing out in Italy as Silvio Berlusconi negotiated what could be politely called a tactical withdrawal and agreed to support Enrico Letta’s government after it became apparent he didn’t have his party’s support with respect to the confidence vote. While he may have run into a brick wall on this occasion Berlusconi has never lacked the capacity to surprise, so I would doubt that we have heard the last of him in this regard. In any case while the political uncertainty in Italy may have subsided for now it still remains quite likely that any type of reform is still set to remain slow and problematic. As for the rest of Europe’s markets while the FTSE may get a slight boost from a positive China services PMI, they continue to have one eye on events in the US, finishing lower yesterday along with US markets, though after yesterday’s non event of an ECB press conference, todays focus is on the latest services PMI data for September for Italy, Spain, France and Germany. All are expected to show positive readings above 50, with the exception of Italy, which is expected to come in at 49.2, raising expectations of a continued recovery. While the ECB President was at pains yesterday to preach caution about the weak recovery, his jawboning no longer appears to be having the effect it once had in pushing the euro lower. It’s all very well telling the markets you have plenty of space in your toolbox to ease policy further, but at some point you will have to put your money where your mouth is, and while Draghi remains reluctant to do that the rising euro will likely kill off the recovery. As for the UK, the recovery continues to gather pace if the latest September PMI’s are to be believed, even though both manufacturing and construction came in shirt of expectations they still came in well in the highs 50’s. Today’s services PMI is also expected to show a strong number, with expectations of a reading of 60.5, unchanged from August. Such a strong number would raise expectations of a near 1% rise in Q3 GDP, and could well send the pound to its highest levels this year. In the US President Obama met with all the major protagonists in the budget battle late last night and, according to John Boehner, made it clear he was not prepared to negotiate on the subject of the budget. With the government shutdown in all likelihood delaying this Friday’s employment report, yesterdays ADP report took on a greater weight than it otherwise would have done. The disappointing number reinforced the prospect that any Fed tapering is likely to be some way off now, coming in as it did at 166k, below expectations of 180k. it is by no means certain that we will get the jobless claims numbers today either, though we will get the ISM services numbers for September, which are expected to come in at 57, slightly down from the August number. EURUSD – the move above 1.3600 keeps the possibility of a move towards 1.3710 on the table. If we break above these highs then 1.4000 could be a possibility. A break below the 1.3450/60 area which acted as support last week would signal a move towards the 1.3320/30 level. GBPUSD – the previous peaks at 1.6160/70 appear to be containing the dips for now and while they do a move towards the 1.6300 area remains a possibility. We have trend line resistance at 1.6330 from the 2009 highs at 1.7045 as well as the highs this year at 1.6370 which are significant resistance. The 1.5980 area remains the key support area on any pullback. The risk is that a sustained break below 1.5980 could suggest a move towards the lows last week at 1.5880 and the medium up trend support now comes in at 1.5820 from the 1.4815 lows. EURGBP – downward pressure continues to build while below 0.8410 and brings the prospect of a move towards the 0.8280 area, the 50% retracement of the 0.7755/0.8815 up move. Downtrend resistance from the upside can be found at 0.8400 while above that the 0.8470 area remains a key resistance and we need to see a move above the 0.8500 area to retarget the 200 day MA. USDJPY – the US dollar continues to drift lower and the break below the trend line support at 97.65 from the June lows at 93.85, as well as the daily Ichimoku cloud support of the past two weeks suggests the potential for further weakness towards the 94.00 area. We need to see a move above the highs two weeks ago at 100.60 to retarget the 103.70 area. 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