If investors had been hoping that common sense would prevail over the weekend, in either Italy or the US for that matter, then they would have ended up sorely disappointed. Given the protagonists involved in events either side of the Atlantic any other outcome, would probably have been wishful thinking and so it has proved. The actions of Silvio Berlusconi in pulling his five ministers out of the government have shattered the uneasy truce between the coalition parties that had been in place since April, and effectively made Europe’s third biggest economy even more ungovernable than it already has been in the last few months. Even Italian Prime Minister Enrico Letta invoked the power of prayer at the weekend commenting wryly that maybe people should say “some prayers for Italy” ahead of a confidence vote scheduled for this coming Wednesday, as he tries to pull together a new coalition, from more moderate elements of parliament and avoid fresh elections. While the exhortation for prayer may be slightly overstating matters, given the predilection for Italian politics to be completely dysfunctional, the likelihood of a ratings downgrade has increased further given last week’s warnings that one was imminent, in the face of delays at implementing reforms. Mr Letta will certainly need some form of divine inspiration to prevent further weakness on the Italian bond market this week as investors fret about the next turn of events in the latest turn in the long drawn out Italian soap opera with the prospect of fresh elections coming ever closer. Things aren’t much better in the US where Republicans and Democrat politicians are also doing their best impression of looking at pressing the self-destruct button as both parties dig in their seemingly entrenched positions over the agreement of a budget to avert a government shutdown, by agreeing a budget by 1st October as well as trying to find an agreement to raising the debt ceiling, by mid October. The Senate, which is Democrat controlled, approved a short term budget on Friday, however the Republicans sent it back with conditions, tying it to a one year delay in implementing the Affordable Care Act, passed in 2010, or “Obamacare” as it is more commonly referred to, knowing full well that the President would never agree to such a measure, and likely veto the conditional bill, given that Obamacare is one of his flagship policies. This impasse suggests that we will see a US government shutdown for the first time since 1996 given that the Senate aren’t scheduled to vote on the amended bill until later today. The effect on the fragile US economy cannot be overstated as federal employees get put on temporary leave, causing drops in economic output, consumer spending, retail sales and other related economic indicators. Even if this particular pot hole is somehow avoided the thorny problem of the raising of the debt ceiling by mid October is the next carbuncle for markets to obsess about. The small matter of the latest US employment report, due Friday, could well be the victim of any US government shutdown, though we will still get sight of the September US ADP jobs report on Wednesday for further clues about the health of the US labour market. All in all with politics taking centre stage the small matter of reams of economic data from Europe, the UK and the US due this week almost seems like an irrelevance. Manufacturing and services PMI’s, from Europe, the UK and the US, as well as unemployment data from Europe and the US, are likely to be closely watched for signs of continued improvement. The fact is that even if the data is particularly good market sentiment is likely to be driven by the political factors, rather than economic ones. Oh for the days when markets were driven by economic factors, and not political ones. EURUSD – we now have twin highs at 1.3570 and this level is now the main obstacle to a move towards the 1.3710 area. A break below the 1.3450/60 area which acted as support last week would complete a double top formation and signal a move towards the 1.3320/30 level. GBPUSD – continues to remain well supported but is currently finding some resistance at the 1.6160/70 area. While the 1.5980 area remains intact then a test of the highs this year at 1.6310 remains possible. 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 1.5755 from the 1.4815 lows. EURGBP – the break below the 0.8390 area now brings the prospect of a move towards the 0.8280 area, the 50% retracement of the 0.7755/0.8815 up move. Initial support can be found at the lows last week at 0.8350, with interim resistance at 0.8420. On the upside 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 – while US treasury yields remain soft, the US dollar will struggle to rally strongly. While below the 100.00 level the risk remains for a retest of the trend line support at 97.70 from the June lows at 93.85, as well as the daily Ichimoku cloud support of the past week. Only a move below this trend line suggests further losses 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. 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.