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Euro relaxed after stress tests
The euro has gained ground versus the US dollar despite a larger-than-expected number of banks failing the test. Traders were anticipating approximately a dozen banks to fail but the eventual figure was actually 24. The amount of capital required to plug the funding gap was at the low’s end of estimates, and all of the major banks in the eurozone were found to be adequately financed.
Italy and Greece were the worst offenders while banks in France and Spain received a clean bill of health and one small German bank failed to meet the requirements. However, by and large the overall report is positive for the euro.
The Federal Reserve statement on Wednesday will be the focus of the week. We are expecting the quantitative easing scheme to be wound down, and traders will be wondering whether rates will be rising in Q1 or Q2 of next year.
We traded above the $1.27 mark overnight and I would expect another attempt on this level. If we clear the $1.2728 mark (200-hour moving average) it could put the single currency on track to $1.28. Looking at the downside, last week the euro found support around $1.2640. The next level down to watch is the psychologically important $1.26.