Forex.com research director Jane Foley gives todays currency outlook.

Last week’s Federal Open Market Committee meeting restored the possibility that the US Federal Reserve could well ease rates again before it hikes them. Since the S&P 500 reached its April high, the market has observed a fair amount of weaker than expected US data.
 
As it stands the data continues to suggest that the economy is still in expansionary mode; albeit at a more subdued pace than had been expected a few months ago.
 
It will be up to Fed resident Ben Bernanke during this week’s testimony to clarify the outlook for the US economy.  Further pessimism could undermine the outlook for risky assets and the US dollar further.
 
That said the dollar has already given back a fair bit of ground as the market has revised its outlook for the US economy and interest rates and this has translated into a more confident tone in the euro. Ahead of the results of the European Union stress tests, the euro could see renewed jitters,  
 
EU bank stress test results keenly awaited
 
The results of the EU bank stress tests are due on 23 July. Credit analysts have been busy drawing up lists of which banks are likely to have failed: if the tests are to be perceived as credible, failures are considered to be inevitable.
 
In contrast, the tone of many European officials has been confident. The deputy Spanish finance minister Jose Manuel Campa has said that Spain “can only win” from the publication of the tests, Bank of Italy governor Mario Draghi has stated that the stress tests will demonstrate that the capitalisation of Italian banks is well above minimum levels and Bank of Ireland governor Patrick Honohan has stated that Irish banks have already been through more severe tests.
 
The International Monetary Fund’s Dominique Strauss-Kahn has concluded that there will be some small institutions that will have to be refinanced.
 
The official rhetoric along with decent result to the Spanish bond auction and Greek bill sale this week has supported the euro.
 
Clearly the euro could come under pressure if the stress tests bring many casualties. It could also be sold if the stress tests produce too few failures insofar as the tests will be seen as providing insufficient transparency into the interbank market.
 
There could be a thin line where the results appear to be relatively agreeable and the euro can derive support. However, having reached $1.3/€ already, upside potential for the euro could be running dry.
 
UK Inflation debate may be fuelled
 
The debate on whether inflation pressures are building in the UK intensified a month ago when it was revealed that monetary policy committee member Andrew Sentance had voted for a rate hike at the June policy meeting.
 
Since then Sentance has maintained his hawkish view although the consumer prices index release has shown a fall in the headline rate and labour data has brought a moderation in the growth rate of earnings.