The Asian session saw very little action to end the week with the upcoming release of the European stress test results looming. After firm gains for risk in New York due to a combination of solid earnings and good housing data, currency markets moved sideways in Asia as all focus was honed on the European stress test results. EUR/USD was unshaken between 1.2880 and 1.2915 for the session, unable to overtake earlier NY gains through 1.2930 highs. GBP/USD clawed a bit higher posting a gain of 40 pips to 1.5290, perhaps the biggest move of the session. AUD/USD remained just off of earlier 0.8950 highs until some late session profit taking dropped the pair by about 35 pips.

The risk on theme only made it through the early part of the day in the yen crosses but lost steam as the session wore on despite solid gains in equities. EUR/JPY dipped from 112.65 highs to lows near 111.70 with the constant chatter of Japanese officials talking about yen strength playing in the background. Yen crosses remained lower ahead of the stress test results. The USD/JPY pair was jerky to end the trade week, moving between 87.20 to 86.75 highs with a lack of any real direction to note.

The bottom line in the FX markets will be the European bank stress test results. Once these results are released expect a high degree of market volatility as well as further repercussions as the markets try to decipher the tests. A possible scenario would see traders initially judge the stress tests by how many banks passed and how many failed followed by judgment on the severity of the actually tests. This may ultimately be followed by the realization that the real thorn in Europe’s side is not its banks, but its ongoing problems with sovereign debt, thus dismissing the tests as a mere smoke and mirror distraction from the real problem.

The stress test results get released at 16:00GMT by the CEBS, individual results published by banks will follow from there. At 16:30 GMT the CEBS will release a summary of the 91 bank results that will be followed up by a press conference at 17:00GMT. Have a nice weekend…