EUR/USD Likely To Face Whipsaw Price Action Ahead of the ECB Stress Tests Results
Markets may face increased volatility leading up to tomorrow’s highly anticipated EU’s stress tests results as uncertainty regarding the consequences surrounding any failed tests lingers. Indeed, 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. Moreover, the number of banks will be comprised of a minimum of 50 percent of the lenders in the each country and 65 percent of the sector in the region. As of late, Bloomberg News stated that Germany’s Hypo Real Estate Holdings has failed the Europe wide stress tests, while the Portuguese government minister stated that he is awaiting the results of the tests with confidence. From what is understood thus far, lenders may be required to maintain a Tier 1 capital ratio of approximately 6 percent as a condition under the test. The three main scenarios under which the results will be based on include a sovereign risk scenario, an adverse macroeconomic situation, and a baseline macroeconomic forecast for the rest of this year and 2011. If the outcome is worse than expected, European Union Economic and Monetary Affairs Commissioner Rehn said that the union has means to fix any problems that may be found in the stress tests of banks. Indeed, policy makers have been exceptionally optimistic thus far, however, if the outcome shows that banks do not have enough capital to withstand another shock to the financial system, market participants may witness a flight to safety across all asset classes.
EUR/USD: After nearing overbought territory, price action has dipped back below the 100-Day SMA, with the intraday rally hovering slightly above this moving average. Indeed, we are likely to see a lackluster performance in this pair over the next few hours, and price action tomorrow will likely dictate further movements. It is worth noting that our speculative sentiment index stands at -1.34, signaling for additional gains. However, investors should not rule out the ratio flipping into the positive terrain on the back of the ECB stress tests.
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Written by Michael Wright, Daily FX Research
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Michael Wright is the author of FX Headlines, Fundamentals vs. Technical's, Weekly Spotlight, and Forex Trading Weekly Forecast
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