Sterling is Poised to Break to the Upside
The Euro consolidated as traders absorbed New banking information with regard this year’s stress test.  The newly created European Banking Authority will be overseeing the stress tests on almost 90 European banks. The stress tests last year met broad criticism for the lack of substance. It was anticipated that the EBA would provide for a more robust test this in 2011.Â
The definition of Tier 1 capital, which is the part that can absorb unexpected losses, is one concern. The early indication is that the EBA will likely allow countries to use their own definition of Tier 1 capital.Â
Peripheral European bonds were under pressure and the euro slipped through yesterday’s lows against the dollar, but we continue to suspect the price action is largely technical in nature. The underlying signal is still one euro resilience as it appears the interest rate story continues to trump the debt crisis story. The euro managed to fully recover from yesterday’s weakness. Tomorrow traders will concentrate on the German Trade Balance (700 GMT). The release is unlikely to have a great effect on the markets.
The weakness was not confirmed by sterling, which held above yesterday’s lows. Tomorrow traders will be watching the UK interest rate decision and the statement that follows. A Hawkish tone, similar to the ECB, will generate the upside needed to break out of 1.6350 resistance, igniting a new bull trend.
Japan’s January machinery orders rose 4.2% more than twice the consensus. The data lends credence to the BOJ and government view that the economy is recovering after contracting in Q4. The magnitude of the contraction may be revised tomorrow to 1.2% annualized from the initial estimate of -1.1%. Tonight the markets will be watching the GDP data, expectations are for a .3% decrease. The Australian employment change will be watched carefully in Asia. Expectations are for an increase of 21K jobs. The Yen is likely to continue to have safe haven status.
