Foreign Exchange Report : European Bank Stress Test Results Fail to Provide Support For Euro, While USD Remains In Danger

Published: Monday, 18 July 2011 06:51 BST - Written by John Cameron

STORY LINK Foreign Exchange Report : European Bank Stress Test Results Fail to Provide Support For Euro, While USD Remains In Danger

The Pound Euro exchange rate (GBP EUR) is 1.1444. The Pound Dollar exchange rate (GBP USD) is 1.6107. The Pound Australian Dollar exchange rate (GBP AUD) is 1.5184.

The European Banking Authority (EBA) announced the results of its latest Stress Test into the creditworthiness of ninety leading European retail banks late on Friday afternoon.

The EBA deemed that in total, eight banks had failed the test, five of these coming from Spain, two from Greece and one from Austria. The EBA estimated that the eight banks would need to find €2.5bn of additional liquidity before the end of 2011 in order to repair their balance sheets.

Banking analysts had anticipated that as many as fifteen banks would fail the test, so the headline number of failures should have placated the markets. However, the EBA warned that a further sixteen European banks were in danger of failing the next Stress Test unless they took steps to bolster their liquidity.

Commentators have also suggested that the markets doubt the veracity of the tests themselves, following last year’s Stress Test, which saw leading Irish retail bank, the Allied Irish, pass the test. Within a few months, the AIB had to be bailed out by the Irish government. Fears that the test was ‘too easy’ were echoed by leading ratings agency Standard & Poor’s prior to the results.

Market reaction following the release of the test results suggested incredulity, as the Euro failed to gain support. The GBP EUR rate closed on Friday in the middle of its daily range at 1.1400 and re-opening higher at 1.1415 at the start of last night’s Asian session.

Elsewhere, the US is facing a potential debt meltdown as Republican policy-makers allowed President Obama’s latest deadline for reaching an agreement on a workable debt package to pass. The Republican party is continuing to press for stringent cuts in government spending, with no tax rises as the solution; Democrats on Capitol Hill remain unwilling to countenance these measures and continue to push for tax rises.

President Obama last week warned that failure to reach a consensus by the 2nd August deadline for meeting the its current obligations would risk the US defaulting on its debts, pushing the markets to the brink of Armageddon. While Republicans and Democrats fail to pass the necessary measures, the potential for pronounced upside exists for the GBP USD rate, with the 2011 high of 1.6746 a possible target.



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