EUR/USD update (8th July 2010, 15:45)

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by Market Moves Staff

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The euro has recovered all of its earlier losses and has broken through to new high levels for the week.

A large jump to 2.6% growth in German Industrial Production for the month of May helped today’s rally pick up some steam, but the real focus seemed to be investor optimism over new information regarding the parameters of the European Bank Stress tests. Seeming somewhat lenient with regard to the level of stress that banks will be put under during these tests, traders were optimistic that virtually all banks would pass and markets would be calmed. On a long term basis though, it would probably be better to fully test the soundness of each institution, up to and including the potential for a sovereign debt default. On a comparative note, if an engineer tells me that a bridge has been 'stress' tested I would like to find out before I am half way across in my car that it was only tested to the point that it would easily pass inspection, but may not stand up to real life use. Unfortunately, without rigorous testing and results with the aim of truly finding out how much stress the banking system can handle and adapting accordingly, these tests may soothe markets in the short-term, but could be disastrous and leave markets extremely fragile when the next real-life test is faced. If the euro can continue running higher, the next level of resistance looks to come into play in the zone of 1.2730-1.2740.

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