Stress tests boost confidence in the UK

Tom Tong19/Jul/2011Currency Updates

GBP

Sterling hit a one and a half-month high against the euro on Monday after a strong performance by UK financial institutions in banking stress tests added to the perception of the UK as a relatively safe haven from the Eurozone’s debt crisis.

Many investors played down the significance of the stress test results, arguing they were too lenient, but analysts pointed out that the fact that all UK banks had made the grade.

Markets await the minutes from the MPC, which will be released tomorrow.



USD

At the forefront of dollar traders’ minds is the countdown to the US deficit officially breaking its legal debt ceiling. With this uncertainty, along with poor US TIC’s data released yesterday, the US dollar seems to be gradually sold of both against sterling and the euro. With a quiet week ahead for US data it seems likely that the dollar will continue to fall.

EUR

The EU’s stress tests for banks concluded yesterday that 8 banks (5 in Spain, 2 in Greece and 1 in Austria) failed Tier 1 above 5%. On the back of this, Italy suspended trading in government and corporate bonds leading to Italian ten year debt climbing above 6%. Jean Claude Trichet is refusing to consider any private sector burden sharing, which is continuing to stall Greek bailout negotiations. There will be an emergency summit on Thursday in which we’ll see leaders once again trying to agree on an aid package for Greece with the focus on reducing risk contagion.

We also saw European sovereign credit default swaps (CDS) and French CDS hit new record highs to 306bps and 123bps, respectively.

Additionally, the euro hit another record low against the Swiss franc and safety is still being sought in gold and yesterday – its price hit a record high of $1600 an ounce.

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Written by Tom Tong

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