Europe is likely to dominate the headlines once again this week as traders watch political developments in Italy and Greece. The expectation is that national governments will be fully operational in both countries over the coming days so markets will be looking for progress on fiscal initiatives and economic reforms. There are new PMs in place in both countries now, with the Italian lower house of parliament giving its final approval to a package of economic measures over the weekend. Sentiment was also boosted overnight by the news that the Japanese economy grew at an annualised rate of 6.0% in Q3.

The latest developments are helping the euro hold above the $1.37 level versus the USD but markets are likely to be cautious about pushing it higher, given that there is still much uncertainty about the sovereign debt situation. Markets will also be watching to see if the ECB continues to support the Italian bond market. The ECB also holds its monthly non-policy meeting on Thursday. This normally confines itself to the discussion of technical issues but in light of the current uncertain environment and downside risks to growth it is probably worth watching, particularly after last Friday’s comments from the ECB’s Nowotny about “more decisive ECB action potentially ahead”.

Some key eurozone data also feature this week, which again could leave the euro vulnerable. Preliminary Q3 GDP data are expected to show growth of 0.2%, the same pace of expansion as in Q2. However, this is unlikely to ease concerns about recession. Indeed, a weak outturn for Q4 is likely to be underlined by tomorrow’s ZEW investor sentiment survey for November. The headline index is forecast to show yet another drop following last month’s fall to its lowest level in nearly three years.