Reminder: The European stress test rally may have already happened for the euro.
The euro rallied substantially ahead of today’s European bank stress results, and thus it could easily be that a positive result is already priced into the market. This means that the actual results have a lot of room to disappoint expectations, even if they are decent.
Morgan Stanley believes the euro move from $1.19 to $1.30 is finished, and now the euro will be trending back to $1.19. Note U.S. bank stocks actually fell after the U.S. bank stress tests as shown by the graphic below.
Another key factor in the euro’s recent rise has been the recent softness of US economic data and the impact that this might have on Federal Reserve thinking in terms of further possible easing measures. Chairman Bernanke’s testimony this week was to a large degree focused on exit strategy and what form this might take when appropriate, but given the recent weakening of economic data, this is unlikely anytime soon.
(Morgan Stanley, FX Pulse, Stephen Hull, 22 July 2010)