Forex market sees rising euro just hours before the release of E.U. bank stress test data; Forex traders keeping a watchful eye on the USD-Japanese yen exchange rate

Euro is not following the anticipated script – Somewhat unexpectedly, so far today, the euro has been showing strong gains against the U.S. dollar, hovering around 1.2931 USD (up 1.4%) at 6:10 a.m. in New York. This seems to fly in the face of conventional wisdom suggesting there would be a slight drop in the value of the euro in the hours leading up to the release of the results of the E.U. bank stress test later today. However, it does seem to confirm the conviction of one highly respected forex market analyst, Stephen Gallo of London-based Schneider Foreign Exchange, who continues to say the fair value of the euro should be in the range of 1.30 USD to 1.35 USD. News from Germany of rising business confidence, the highest since 2007, is one likely reason for the up-tick. In addition, the transparency coming from the bank stress test is seen as constructive, a view that outweighs concerns the stress test may be a watered-down version of the strenuous tests previously faced by U.S. banks. Things may change if there is surprisingly bad news regarding the sovereign debts holdings of the tested banks, some forex analysts suggest.

Japan may try to reign-in the yen – With most eyes focused on how the results of the E.U. bank stress test will affect the value of the euro against the U.S. dollar, savvy forex traders are busy looking at the numbers on the Japanese yen versus the dollar. The currency has continued to show strength versus the dollar and the euro, and this is making Japanese leaders nervous. The reason is Japanese exports will take a big hit as the nation’s currency appreciates and the cost of Japanese products skyrockets in overseas markets. In some quarters, there are now expectations of government intervention, perhaps imminent intervention, based on the stress test results and the dim outlook for the U.S. economy. According to various news reports, some analysts suggest should the level of the yen reach 85 USD, the likelihood of government intervention is high. Others say the range likely to prompt government action is somewhere between 80 USD to 85 USD. At press time (July 23, at 6:10 a.m in New York), the yen was trading at 87.135 USD.