Some were citing the fear that Germany could be on the hook for a whole host of other countries’ debts, the European Commission’s options for eurobonds also having been published yesterday. This could become a more entrenched fear, but at the moment it’s a peripheral one for investors. Germany remains the safest and most liquid place for eurozone bond investors and will remain so.

Markets are taking a fairly dim view of the European bank stress test results, with the Asian session seeing a more defensive stance being taken towards the single currency.  The fact that the headlines put Spanish and Italian banks as coming out on top has been taken with a degree of scepticism by some, on the basis that these are where the bigger concerns lie on a country-wide basis.  

Furthermore, the tests ignored a scenario to which the market is giving a 90% probability of happening (Greek restructuring), which severely diminished their usefulness in the eyes of many.  Eight banks failed, with capital raising requirements of EUR 2.5bln, the latter being roughly similar to the shortfall in the 2010 tests. For FX, the Swiss franc and yen are the main gainers overnight, with EUR/CHF down to 1.1430, facing up to a seventh consecutive session of declines. Meanwhile, the US debt limit negotiations continue, so we are facing up to a long and potentially choppy week.

Stress Tests II promised to be more serious. Perhaps they were better than last year, when all Irish banks passed only to collapse four months later.

The problems begin with the previous report. Most of the banks passed the tests published in July 2010. The amount of capital that was needed was quite small. All the Irish banks passed the tests.

At the beginning of May, the financial world was rocked by sovereign debt issues in Europe. IT turned from a “Greek tragedy” into an all-European problem, as much bigger countries such as Spain were seen struggling to pay their debt and to finance old loans.

The European stress tests are slowly being released. Each bank gets its grade: pass or fail. Currently many Spanish banks receive a Fail grade. In the meantime, EUR/USD is slightly lower.

But it doesn’t have to be necessarily so:

After the recent rally, a busy week expects Euro/Dollar traders. Apart from many important indicators, Friday’s stress tests are critical for the Euro. Here’s an outlook for the European events and an updated technical analysis for EUR/USD, now in higher ground.

EUR/USD daily chart with support and resistance lines marked. Click to enlarge:

EUR/USD began a strong upwards move on last week’s Non-Farm Payrolls but couldn’t break the resistance line. These moves came on top of US weakness and not on an improvement in Europe. I already wrote about these issues earlier this week. Now let’s look at another technical aspect.

Monday, May 4th:  Both British and Japanese banks are on holiday, so trading will start slowly. German Retail Sales are expected to stop falling. In the US, Pending Home Sales are predicted to rise by a modest 0.1%.