The week opened to further market analysis on last Friday’s stress test results from Europe. Hometrack housing data came out slightly weaker than previous, U.K. house prices dropped y/y to 2% in Jul from 2.1% previously which weighed on the pound. Additional weakness in the pound came from further housing figures, Nationwide house prices dropped to -0.5% m/m in July while mortgage approval fell to 47.6K in June. The only factor providing any independent support for sterling came from reported sales figures released by the Confederation of British Industry (CBI). The CBI indicated sales in July grew by their fastest pace in 3 years and showed retailers to be at their most optimistic about future prospects. The pound’s activity was tempered somewhat by that fact that the stronger figures were boosted by the recent football World Cup and warm weather.

The majority of the week saw the thus the focus for traders falling on the analysis of the E.U. stress test results and expectations regarding the U.S. Q2 GDP release. Sterling appreciated versus the dollar on the back of the euro rally and concern over a slowdown in U.S. economic activity.

Profit-taking on the previous euro gains ended after the release of the greatly anticipated European banking stress tests last Friday. European banks performed well with only 7 minor financial institutions failing the tests and needing to raise capital. The results calmed the markets concerns that banks would be forced to raise capital which could have placed undue pressure on balance sheets and thus trigger a second round of bank bailouts. The Euro failed to rebound in the early part of this week as analysts were underwhelmed by the test result publications. Many felt the tests were not strict enough due to the fact that it assumed there would be no chance of sovereign defaults and thus did not show the financial sectors exposure to sovereign debt. Many banking institutions did release their sovereign debt exposures independently, however. As confidence and investor risk appetite rose the single currency pushed higher across the board although ranges in GBP/EUR were not broken.

Economic data from Germany increase market optimism as they showed an improvement in the indices across the board. German unemployment fell to 7.6% from 7.7% and German retail sales figures rose to 3.1% from -2.4% the previous month, German GfK consumer confidence rose to 3.9 in August, higher than the 3.5 expected.

Key technical levels in EUR/USD came into play as the euro appreciated above 1.30 and saw the single currency settle into range trading as the week matured and focus shifted to U.S. GDP figures.

The U.S. dollar struggled across the exchanges as a surge in investor confidence and risk appetite pulled the greenback lower for most of the week. Economic data this week has added further pressure as the figures indicated support for recent speculation that the U.S. economy was indeed slowing. Apart from U.S. new home sales that rose to 330K in June, up from May’s 267K release and initial jobless claims improving slightly the remainder of data came out weaker. Consumer confidence fell to 50.4 from 54.3 and U.S. GDP Q2 advance data dropped to 2.4% from 2.7% in the first quarter. The U.S. GDP data was particularly significant as the drop in growth numbers sparked some risk aversion and pulled the dollar higher as the week came to an end.

The Federal Reserve Bank released its Beige book report which weighed on the dollar, the Fed indicated that “the pace of economic activity had slowed recently” and that those regions that did see in increase in activity experienced a moderate pace at best.

The dollar reached a 5 month low versus the pound and a 3 month low against the euro this week as safe haven demand was reduced and confidence in global markets increased. Technical levels did allow for some profit-taking but did not trigger a rebound or break the newly established ranges for the greenback.

Next Week

After the lower than expected growth figures for Q2 in the United States markets will be alert to any further signs of a slowdown in the U.S. economy. Durable goods order and pending home sales, from the States, will serve as early indicators but key for the dollar will be Friday’s release of employment data. The Fed has highlighted employment as a crucial factor in determining whether further stimulus would be required to support the U.S. economy. The unemployment rate and non-farm payrolls figures are both expected to improve slightly but in the context to previous releases the general trend for the job sector is still to the down side.

The main market events for the pound and the euro will be the Bank of England and European Central Bank’s rate decisions on Thursday, neither central bank is expected to make any changes to lending rates or their respective quantitative easing measures. Confidence in Europe after the positive stress test results is likely to ensure that risk appetite and investor sentiment continue to play a role in determining currency market directions.

Economic Data Releases