Last night's late selloff in US markets and the euro on account of the political deadlock and instability in Italy looks set to see European markets open sharply lower this morning as investors play catch up on overnight events.
It would appear that Italian voters have given two fingers to the policies implemented at the behest of Brussels, with outgoing Prime Minister Monti relegated into fourth place with the country split three ways between Bersani, Berlusconi and Grillo.
It seems unlikely that the three of them will be able to form any form of coalition which raises the prospect of a second election, given the strong performance from the Five Star movement of Beppe Grillo.
Italian bond yields yesterday initially slipped as low as 4.17%, however as it become apparent of the extent of the potential deadlock, the turnaround was swift and the risk is now that these yields will push up beyond 4.5% towards the 5% level.
In the US the latest testimony by Ben Bernanke to Senate Banking Committee is likely to be more of a sideshow to events in Europe but markets will be looking for the Fed chairman to expand on the somewhat hawkish interpretation of last week's FOMC minutes that caused markets to drop sharply. The questioning is likely to revolve around the subject of tapering or adjusting the amount of asset purchases in line with how good or bad the economic data is, and any notion that the Chairman could be open to something along those lines could well be perceived badly by the markets.
The latest consumer confidence numbers are expected to give an indication as to whether or not January's sharp drop was merely a blip due to the uncertainty surrounding the tax rises due to kick in at the beginning of the year or whether it is a beginning of a much more cautious consumer as we head towards the March 1st sequestration.
Since November consumer confidence has dropped from 73 and is expected to show a February reading of 61, a slight recovery from the January 58.6.
EURUSD - a painful short squeeze into the neckline at 1.3320 yesterday followed by a sharp drop lower looks like we could be about to see the move towards 1.2900 unfold. For now we appear to be finding some support at 1.3150 with larger support around the 100 day MA at 1.3120.
While below 1.3520 and the 200 week MA the bias remains for a move lower and also keeps the bearish weekly candle scenario of two weeks ago alive.
GBPUSD - a failure to push below the Asia lows at 1.5070 precipitated a bounce back towards the 1.5200 area. We need to see a move back through the 1.5270 area to argue for a deeper pullback towards 1.5400.
A break of 1.5070 argues for a longer term move towards 1.4950, which is the July 2010 low.
EURGBP - a break above the trend line resistance from the October 2009 highs at 0.8765/70 saw a sharp move towards 0.8810 before a sharp reversal, posting a key day reversal. This suggests we could well see a test of the 0.8580 level, a break of which has the potential to retest the lows last week at 0.8460.
USDJPY - the failure to break through the 95.00 area and 2010 highs precipitated a sharp sell-off and saw the US dollar fall below the 92.00 level making a low of 90.90 before rebounding strongly.
While above the 90.30 level and 29th January lows the potential for further gains remains with a break of 95.00 targeting a move towards the August 2009 highs at 97.80.