The currency blog

The results of the Eurozone bank stress tests were eventually released on Friday evening showing only 7 of the 91 banks tested were deemed to have failed, and the capital shortfall was estimated at €3.5 bn. Both are very much at the lower end of consensus forecasts, raising questions over the credibility of the tests. Interestingly, a sovereign default or restructuring scenario was not included, as media leaks earlier in the week had suggested. At the press conference, ECB Governing Council Member Constancio justified this decision by noting that “instruments have been put in place precisely to avoid that scenario”. Nevertheless, as the leaks had suggested, many participating banks voluntarily disclosed their sovereign debt holdings, and this has brought some improved transparency on sovereign debt exposure. This seems to have averted any euro selling pressures as the single currency continues to trades close to Friday’s 1.29 range against the dollar.

From a data perspective, the euro had already managed to move higher on Friday morning after stronger than expected German business sentiment data. The German IFO business confidence index recorded its strongest rise for 20 years in July. The closely watched index rose to 106.2 points from 101.8 in June. Germany’s economy shrank by almost 5% last year, but has been recovering due to strong exports. The result was much better than expected, with most economists having expected a slight fall.

The British pound managed to stage a rally on Friday, gaining over 1% versus both the US dollar and euro after the release of very positive Q2 GDP figures. The Office for National Statistics showed gross domestic product jumped 1.1% q/q, its fastest rise in four years. On the year the level was 1.6%, beating the projected 1.1% and the first positive reading in two years. The release, which showed Britain’s economy grew almost twice as fast as expected in the second quarter of this year was propelled by a sharp rise in the services sector (expanding 0.9% q/q) and the largest contributor to the increase, construction, which leapt 6.6% on the quarter, its fastest rate since 1963. Market traders and investors welcomed the positive data release, with many now focusing on the increased possibility of an interest rate hike before the end of the year which would suggest the prospect of further monetary stimulus is now looking less likely.

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