EUR shrugs off the ECB's stress tests results

EURUSD gapped higher at the open as the euro responded positively to the ECB’s stress tests. The official report confirmed the data that was leaked on Friday, with 25 banks across the eurozone failing the test with a total shortfall of EUR24.6bn. This is based on banks’ end-2013 balance sheets and many of these banks have recapitalised since then. Post-recapitalisations there’s only around 10bn in shortfall across 13 banks, which isn’t overly concerning.

None of Europe’s largest banks failed the test, nor did any banks in France or Spain (there was one technical failure in Germany). Italian and Greek banks fared the worst in the test, with 9 banks in Italy and 3 banks in Greece failing the test. There were also 3 banks in Cyprus that failed the tests.

Overall, the results are slightly encouraging but are by no means game changing. The relatively small number of failures may cause the market to once again question the effectiveness of these tests. More importantly, the review does almost nothing to assess the ability of these banks to increase lending in the region, without which growth is going to remain in the doldrums.

EURUSD

EURUSD jumped to a resistance zone around 1.2700 at the open, before drifting back towards Friday’s close. This isn’t surprising given that the market had time to prepare after the information that was leaked on Friday. Also, USD strength, perpetrated by a push higher in USDJPY, may be flowing in EURUSD. From here, we may have to wait until European markets open to assess the long-term impact these tests will have on the euro. A slight positive reaction from banking stocks this evening may bolster the common currency.

Source: FOREX.com