The result of Europe’s bank stress tests are expected to restore confidence in the financial system this Friday. However, it is not clear whether the outcome will achieve this goal as many details regarding the stress measures lingers. The tests will include 91 banks, with two thirds in the public sector, while the outstanding one third will include banks across the private sector.

Furthermore, the number of banks will be comprised of a minimum of 50 percent of the lenders in each country and 65 percent of the sector in the region. Leading up to the highly anticipated announcement, Bloomberg News stated that Hypo Real Estate Holding has failed the Europe wide stress tests. On the other hand, all is supposedly well in Greece according to Finance Minister, George Papaconstantinou as he recently said that all banks in region are expected to pass.

The euro eased back from near three month highs versus the dollar yesterday as traders turned cautious on the back of a fall in European bank shares and talk that gains in the single currency were overdone ahead of Friday’s release of bank stress tests results.

Retreating from $1.3029, the EUR fell all the way back to the low $1.28’s before finding some support, with gains in Asian stocks on the back of a late Wall Street rally helping to lift market sentiment. Ahead of the news on the European banking sector, markets will be zoning in on comments from Fed Chairman Ben Bernanke, who is before the Senate Banking Committee later today. There is some talk that he could indicate that the central bank stands ready to provide fresh support measures to the economy if needs be, which could weigh on the USD.

Sterling has started the day holding onto gains seen yesterday versus the EUR following the single currency’s fall back versus the USD, with weaker than expected public sector data for June having minimal impact on the GBP. Canada’s central bank increased interest rates at yesterday’s policy meeting by 0.25%. The move was in line with expectations but provided a boost for the CAD nonetheless.

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Tom Trevorrow
Senior Trader