Today’s Services Purchasing Manager’s Index showed all too clearly the problems facing Europe. The ‘one size fits all’ composite index showed a higher than expected reading of 52.3. But peeling off the layer of Euro-hype reveals a picture of contrasting fortunes.

The headline EU figure was boosted by strong activity in Germany and France, but disguised worryingly poor figures from Ireland, Italy and Spain. These three countries all produced numbers of lower than 50 (50 is the pivot number; above 50 suggests an expanding sector, below 50 signals a contracting sector).

Germany, which historically favours keeping inflation low (and owning the rest of Europe) is happy to back the ECB’s tough stance of not cutting interest rates. Forecast growth of 4% for Ireland suggests they too will cope with the situation, but Italy is expected to grow by a paltry 0.7% this year.

Government bonds issued by countries in the EU were generally thought to be of similar credit quality (safety in the masses, same accounting rules, and all that), though in practice Italian bonds used to pay slightly higher interest. But yesterday, Italian and Spanish bonds were yielding 0.5% more than German bonds, suggesting a strong preference for bratwurst over salami or paella. And whilst we’re talking about Italy, big hand to Arsenal for seeing off Milan in their own back yard.

In the meantime the Euro has been banging out record highs against the US and UK, both major export markets for the EU. But the protests are getting louder. Jean-Claude Trichet, president of the European Central Bank, tried to use the minimum level of sarcasm when he referred how important it was that the US was re-affirming its ‘Strong Dollar Policy’. Ministers from the 15 Eurozone countries issued a statement on Monday night saying: “In current circumstances, we are concerned about exchange rate moves. We don’t think the recent moves are reflecting economic fundamentals.”

The Euro hasn’t made a fresh high against the Dollar since Monday, but last week’s rally has still left it technically overbought. I reckon it can afford to drop to its 10-day moving average at just below $1.51 without giving off reversal signals.

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Heads up for loads of economic numbers out of the US later on. Most important is the ISM Non-manufacturing number due out at 3 o’clock (market expects 48 ish). But before that there’s the ADP Employment figure (forecast 15,000), which (sometimes) provides a useful pointer to Friday’s Payrolls figures. Filling in the gaps there’s Q4 Productivity, Factory Orders and Oil Inventories.

Happy Trading