Forex snapshot

The single currency is trading higher after 24 European banks failed the stress test. Meanwhile, the pound has extended its gains versus the US dollar but has dipped under the $1.61 mark.

Euro and dollar note
Source: Bloomberg

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. 

Sterling slips below $1.61

On Wednesday, the Bank of England minutes drove the pound below the $1.60 mark. The pound has been gathering pace since then but has remained in its downward trend since July, so any rallies by sterling could be short-lived.

The only economic announcement from the UK today is the CBI realised sales report at 11am (London time). We are expecting a reading of 29 for October (the previous month came in at 31), and a decline on a monthly basis could justify the BoE hints that interest rates will remain unchanged well into 2015, which will curtail any surges from sterling.

The US will announce pending home sales at 2pm (London time) — the consensus is for a rise of 1.1%. The US property data has been strong recently and a spike in pending sales could lead traders to conclude that the Fed will increase rates sooner than expected.

Sterling has found support in the $1.6020 region. A drop below could put $1.60 on the map and the next support level down is the $1.5960 mark. On the upside, $1.6120 needs to be breached in order to put the recent high of $1.6184 in sight, and then the target would be $1.62. 

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