How will stress tests affect exchange rates?

23rd July 2010
Good morning. There are some key things today that will likely cause some volatility in exchange rates. For the UK, we have the 2nd Quarter GDP figures that will show if the economy is growing. The main news today though is the EU bank stress tests. More on that in a moment, first the usual snapshot of rates as at 08:30am:

UK Gross Domestic Product
The figures are released at 09:30am. The GDP is considered as a broad measure of the UK economic activity and health. We expect the figures to show a quarterly growth of 0.6% and an annual growth of 1.1%. If the figures are worse than this, expect Sterling exchange rates to fall. GDP indicates if we are recovering from the recession, and so the figures are watched closely by the currency markets.

EU Bank Stress Tests

The health of Europe's banks will come under scrutiny again later, when the results of EU-wide bank stress tests are published at 5pm.

The objective of the extended stress test exercise is to assess the overall resilience of the EU banking sector and the banks' ability to absorb further possible shocks on credit and market risks, including sovereign risks, and to assess the current dependence on public support measures.

91 EU banks are being checked, which is 2 thirds of the EU banking sector, in a move designed to reassure investors over the health of Europe's financial sectors. The tests assess whether banks will be able to survive future economic shocks.

The UK's four major banks are being tested, but are expected to be fine. This is the most important event for the currency markets in some time, as the results will either strengthen or weaken the Euro significantly.
So how will these stress tests affect exchange rates?

If all is fine, then it will likely boost confidence in the EU, and the Euro could strengthen causing GBPEUR exchange rates to fall. If the tests show that there are indeed problems with some of the banks, then it could significantly weaken the Euro which would push GBPEUR rates up.

So things could move either way today. As the results are coming so late in the day, only the US markets will be open. We could see some significant moves, and then again on Monday when EU an d UK markets re-open.

Rates could move for you or against you today, but they will likely move one way or the other. To avoid being caught out if rates don't go your way, get in touch today to discuss our stop loss orders. This allows you to aim for a better rate, but have a level of protection should rates drop below a pre-agreed level.

We will of course have a full breakdown of the tests in Mondays report. Enjoy your weekend.


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