Overnight the sovereign rating of Italy was lowered by the ratings agency Standard and Poors to A from A+ on the back of beliefs that the debt levels in the country will continue to rise while growth will remain depressed. There was also pressure on the political side of things as the company ruled that “Italy’s fragile governing coalition and policy differences within parliament will continue to limit the government’s ability to respond decisively to domestic and external macroeconomic challenges”.

Obviously this has had a negative effect on the euro, erasing some of the gains it made into the close last night. Positive noises came from the joint conference call between the Greek Finance Minister and the members of the EU/ECB/IMF troika yesterday suggesting that the parties may be nearing a deal on further austerity measures and cutbacks. It is rumoured that full details will be made clear on Wednesday.

It was not all positive euro news from Greece however as a news article (available here) reported that the Greek PM is considering a referendum in the country on the continued membership of the Eurozone and the single currency. Pretty weird stuff I’m sure you’ll agree and to be honest recent polling data suggests that the slight majority of Greeks would prefer to stay in the Eurozone than leave. It is obvious that it is in Greek’s creditors’ interest for them to stay as is as well.

Another euro negative was the report that one Chinese investment bank has cut its FX lines with the main French banks (Societe Generale, BNP Paribas, Credit Agricole) according to Reuters. If you combine that with the report in the FT that the German industrial manufacturer Siemens withdrew between EUR4bn and EUR6bn from French banks and deposited it with the ECB, it is easy to see why the uncertainty on the euro remains high.

On the other side of the Atlantic, the Fed starts its 2 day September meeting. The meeting was extended to account for additional discussions over further monetary policy easing that may be needed to keep the US economy going.

The main European data today is the German ZEW index of economic sentiment due at 10am. The expectation is that it will remain weak as a result of the continual recovery fears although a bounce may come if exporters are now more confident thanks to the weaker euro. I doubt it however.

As with all recent trading sessions the possibility for surprises is vast today and as such caution is advised.

Latest exchange rates at time of writing