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It has been a lacklustre day post the G8 meeting at the weekend (yawn), the drop in Mark Zuckerberg's net worth seems to be more of a talking point than the continuing Eurozone crisis. But, the Eurozone banking index gives it all away. Bankia, Santander and the usual Spanish suspects all turned lower as we headed into London's lunchtime, which dragged the overall European banking sector down to its lowest level since November 2011. Within a matter of hours EURUSD followed suit and is making fresh lows of the day at 1.2730 (at the time of writing).

Official EU disappointment


Although a temporary bottom may be in place at 1.2624 in EURUSD, the G8 summit highlighted a couple of things that remain negative for the single currency: 1, how divided the Eurozone (and the world) is about how to resolve the sovereign debt crisis, and 2, it set the stage for a showdown between France and Germany over Eurobonds, which could disrupt the recent calm in the markets.

Today was fairly light in terms of economic data. There were some interesting headlines worth noting as we lead up to the EU summit on Wednesday. An EU spokesperson said that the region was satisfied with steps taken by the government and regions in Spain, even though Spain had to revise up its budget deficit from 8.5% of GDP to 8.9% for 2011 after irregularities with the accounts in some of the autonomous regions. Eurostat experts are heading to Spain later this week, but Spanish bond yields have remained fairly stable around 6.3% and didn't repeat history after Spain revised higher its deficit for the first time earlier this year.

ECB members and the EU President Van Rompuy have both called for closer integration today, although Van Rompuy also dampened expectations for any concrete solutions to be found to the debt crisis when the EU meets on Wednesday. A German spokesman said that the Eurozone's largest economy remains opposed to Eurobonds, which are garnering lots of attention as the only way to fight contagion if (or when) Greece leaves the currency bloc.

In the past EU summits have tended to sooth the markets in anticipation of official action to stem this crisis, however, when the meetings come up with no solutions risk assets tended to sell off. The ECB seems unwilling to step in to fill the policy gap after it announced that it didn't expand its purchases of sovereign debt last week. Thus, a disappointment at Wednesday's EU summit could be one of the triggers leading to another leg lower for risky assets.

Intervention at the ready ...


Another theme that may develop in the markets is the prospect of official action to stem yen and Swissie strength. After diving below 79.00 last week, USDJPY has managed to claw back some gains, however a Ministry of Finance official said that they are watching movements of the yen closely and stand ready to act. Likewise, EURCHF is edging closer to the 1.20 floor imposed by the SNB. We believe this level will be defended by the Swiss central bank as it has pledged its credibility on mainiting this floor and continues to call the franc over-valued. 1.2020 is primary resistance if we do get the SNB intervening in the markets.

Tracking the Fed


With 40 days to go until the end of Operation Twist the Fed is also coming back into focus. We heard from President of the Richmond Fed Jeffry Lockhart today (he is a voting member of the board) who said that the conditions were not ripe to expand QE but it can't be ruled out amid the on-going European risks. He has reiterated that the FOMC remains in wait-and-see mode, which is another reminder that the ECB seems like it is the only central bank not willing to step in with further policy support after the Fed, Bank of England and the Chinese authorities have sounded dovish and hinted at more stimulus if the Eurozone crisis takes another turn for the worst.

Market moves:


A record number of shorts in EURUSD have led to some profit taking in recent sessions and 1.2624 now seems like a short term bottom. 1.2820 remains the ley level to beat on the upside ahead of a move towards 1.2950, which acted as strong support on the way down. Usually when the market is positioned one way, as is the case with the euro, we see a pullback; however, technical levels can be thrown out the window during times of panic. Thus, if the sovereign crisis flares up once more then EURUSD could be headed lower, until then expect some fairly vicious pullbacks.

Gold is a major mover in the last couple of days. It climbed $70 from reaching a low on Wednesday; however the bulls have been thwarted as we approach $1,600. It's too soon to say that gold has de-coupled from risky assets since its ascent (although steeper than other asset classes) has coincided with calm descending on the markets and even the oil price managed to claw back some recent losses. $1,575 then $1,550 remain key supports on the downside, while $1,614 - the base of the weekly Ichimoku cloud - remains key resistance.

USDJPY has managed to recover, but remains under some downward pressure and is still below the top of the weekly Ichimoku cloud. It looked fairly oversold below 79.00, so we may see a recovery back towards 79.50. 78.50 is acting as good support.

The markets are looking for the next directional move. In terms of future price direction, I'm keeping an eye on European banks (if they weaken that is euro negative and dollar positive), the euro - to see if investors respect the CFTC positioning data and the copper price. Copper is a great lead indicator for market sentiment towards both China and the Eurozone. It has recovered above $340 and the next resistance level of note is $20 away, leaving some more room for a recovery if the Eurozone can stop itself from imploding in the near-term.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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