On late Friday night a Portuguese constitutional court ruled that the proposed cut to pensions and government wages would not be permissible and in essence will send the nation towards a collision with the E.U. after agreeing  earlier on the austerity conditions in order to receive additional bailout funds. What happens now is the government leadership will have to find an alternative route with the E.U. while it asks for additional time knowing full well it will not be able to meet budget and debt ratios that had been asked for.

And more importantly it widens the potential austerity battleground into Italy due to its political mess and what the next Italian election may produce. The idea of additional taxes, budget cuts, and lower wages is not going to exactly sit well with most populations. The more Italian citizens watch their fellow European citizens say no to the E.U., the chances increase that what we are seeing from the likes of Portugal and Cyprus are only the beginning of the crisis as Italy and Spain prepare for further dramatics.

Little by little what we are witnessing is the southern nations of Europe racing towards a corner turn without any way of really maneuvering through it without a massive and painful crash. Cyprus a couple of weeks earlier found out what it is like to be on the receiving end of the European Union’s medicine. Each nation is likely to be offered a different cure, but at the end of the day the cures may prove not only repellent, but also unworkable antidotes.  The poison of debt, austerity, and recession may be enough to eventually force the southern nations out of the E.U. monetary union, and the EUR as we know it is likely to be a vastly different currency in a few years time.

The EUR performed better after the ECB’s monetary policy theatre production on Thursday and closed Friday trading near short-term highs. But like the sun the forex markets always see a new day and different perspectives. Gold has gained a bit and is near 1575.00 with the markets closed. Crude Oil continued to decline and test lows, WTI was around 92.70 going into the weekend.

From the States on Friday the Non-Farm Employment Change numbers proved disappointing, missing their expectations and showing signs of weakness among several important statistical categories. Wall Street turned in a slightly negative session, but is still maintaining much of the gains it has made since the beginning of this year.

On Monday the German Industrial Production data will be published along with the broad Sentix Investor Confidence reading for Europe. From the U.S. Ben Bernanke is scheduled to speak in Atlanta.

The JPY has continued to weaken under pressure via the Japanese government’s mandate and the BoJ’s monetary policy. The Yen is being watched closely by many governments in Asia, and in Europe and the United States too. The GBP has gained in recent trading against the USD having come off of its low water marks. Traders who believe the EUR may be too costly, may have the same feelings about Sterling going into Monday’s markets.

The next month of trading in forex is likely to continue to produce fast and volatile terrain for traders. Risk management will be essential when testing trends. Yesterday’s less than promising jobless results from the U.S. will likely mean that the Federal Reserve will be in no hurry to alter its current monetary program. This is not particularly good news for the global economy long-term. With both Japan and the U.S. keen to lower the values of their respective currencies, Europe which is suffering the onslaught of a recession is bound to struggle more because of the ‘undeclared’ currency war. And the prospect of battling cheaper Japanese exports will cause China headaches as it tries to feed its stumbling growth engine.

Challenges ahead? Yes.