As it turned out Friday’s release of the results of the EU bank stress testing exercise proved not to be the event that would push the dollar/euro rate out of its recent range, with a move through the $1.30(resistance) level still eluding the single currency. While the results have brought some stability to the market, thus providing a bit of a lift for the euro, many are skeptical of how stringent the tests actually were, given that only a handful out of the total 91 banks failed.

Dominating the end of last week’s financial economic data releases was the ONS’s release of UK GDP data – this was rather positive to say the least with results showing second quarter growth of 1.1% (double expectations) up from 0.3 in the previous quarter. Following the release the GBP/EUR cross witnessed a good level of “Long” positions buying towards 1.20 resistance which was the target for a lot of speculative positioning, since however the Pound seems to have lost its momentum and remains stable at 1.1976 – with intra day trend up on the day. The GBP/EUR pair has become increasingly unpredictable with a lot of price action dominated by speculators taking profit, however – it may be worth noting the Euro-zone is expecting a number of top tier releases this week which may help support Euro (short term) price movement therefore a test of 1.1911 (Support) is likely.

Sterling has started the week on a firm note versus the US dollar, helped by the rise in risk appetite as well as Friday’s better than expected Q2 GDP report, hitting three month highs close to $1.55 in early morning trade. This is one of the highest levels we have seen for about 16 weeks and US Dollars sellers should consider short / medium term requirements as further upside movement against the Greenback is likely. With the banking exercise out of the way in the Euro-zone, the focus is likely to switch to fundamentals, which could leave the dollar vulnerable following last week’s string of disappointing US data. The main focus will be Friday’s release of the first estimate of Q2 GDP, which is expected to show growth of 2.5% (annualised), a modest slowing from 2.7% in the previous period.

The pound rallied against all other major currencies, but gains against the Aussie (commodity sensitive currency) were limited to just one cent. The Aussie dollar has also been benefitting from US dollar weakness as investors continue to take on more risk and buy high yielding assets. Australian inflation figures due out on Wednesday (consumer prices) may heap further pressure on the Reserve Bank to raise interest rates again at their next meeting on August 3rd. The RBA said in its July meeting minutes that it would be monitoring the European stress tests and local inflation conditions in deciding whether to raise rates from their current 4.5% at the August meeting. Given the positive stress test result, futures markets are now pricing in a 30% chance of a rate hike next week compared to just 13% a week ago. That 30% may still underestimate the chance of a rate hike next week if Wednesday’s inflation data is stronger than expected.

Whilst the Pound currently trades up on the day against a number of its counterparts buyers should be aware the Pound is still in a vulnerable position to selling and buyers with short/medium term requirement should consider protective “Stop” orders to protect against adverse market movement. If you would like to discuss your requirement with me further i can be contacted on my direct line + 44 1736 335264 or you can email me direct at tom.trevorrow@torfx.com