Data positive after US New Home Sales jumped in June following a poor May. Sales increased 23.6% to an annual rate of 330,000. This far outstripped the 3.7% gain economists had predicted. In May Sales dropped to 36.7%, to a low of 267,000. There is a lot of US economic data out this week with Consumer Confidence on Tuesday, Durable Goods and the Fed's Beige Book on Wednesday, and Q2 GDP on Friday along with the Chicago Purchasing Managers Index and the University of Michigan-Reuters consumer confidence. The significance of the data may be heightened after Fed Chairman Ben Bernanke’s “period of unusual uncertainty,” statement last week during the Congressional Testimony as analysts will be searching for clues to back this up from the data. The dollar traded at $1.2907 against the euro at midday GMT and ¥87.10 against the yen.

   The euro continued to consolidate gains on Friday after the results of the stress tests showed that only 7 out of the 91 banks tested had failed and confidence in Europe grew. On Monday morning it was trading mixed as analysts examining the test results began to question whether the tests were strong enough and even whether they hid an ulterior motive to fix the results. Some commentators claim that the ‘worst case scenarios’ did not include the risk of default on national debt even though that is a possibility – if an increasingly unlikely possibility. Other’s have also criticized the minimum capital to asset ratio used, of 6% which they have argued is too low. The euro’s rally is looking increasingly exhausted. At midday GMT it was trading at $1.2907 against the dollar and ¥112.43 against the yen.

   The pound continued to rise after GDP results on Friday showed the UK economy grew by 1.1% in the second quarter of this year, a result which far exceeded analyst’s expectations. Sterling is also supported by the fact that of the 7 banks which failed the test, none of them is in the UK. However many analysts are skeptical about the durability of the rise arguing that a combination of fiscal tightening and loose monetary policy could result in a period of prolonged weakness for the pound. However other’s have argued that the GDP and Stress Test Results will now mean that both potentially higher yields and risk appetite should work in  Sterling's favor and that the relatively positive reaction to the European stress test results should also help the UK as it helps boost the UK’s prospects in the eyes of international investors. At midday GMT the pound was trading at $1.5485 and £0.8338 to the euro.

   The yen lost ground on Friday after positive economic news including stress test test results reduced investor haven demand. The yen regained some ground on Monday as the market began to pick apart and find fault with the stress test methodology and it came to light that the worst case scenario of a sovereign default had not been factored in. Meanwhile in Japan Yoshimi Watanabe, head of  the oppositon ‘Your Party’, voiced concerns over the rising yen and argued for government to step in and artificially weaken it. The yen was in a tight range this morning, however, as data from Japan saw the merchandise trade surplus widened to ¥456b in June, which whilst an increase was not as much as expected. At midday GMT the yen was trading at ¥87.10 against the dollar and ¥112.43 against the euro.

Analysis prepared by:

Joaquin Monfort
Forex4you analyst