With a weekend to digest the impact of the European stress test results, currency markets opened in favor of the dollar and yen as skepticism lingered about the integrity of the bank testing. The early sell off in risk was due mostly in part with investors finding the testing parameters too lenient although 7 of 91 banks failed the tests. Between the seven failed banks a capital shortfall of 3.5 billion Euros was noted. With an open near the 1.2886 level, the EUR/USD opened softer to the tune of almost 20 pips from Friday’s close, but the risk aversion was short lived. Investors who bet on a lower Euro for the test results were eventually forced out of those short positions as a second consecutive day of firm equities helped drive risk higher. EUR/USD was eventually able to top 1.2940 and the EUR/JPY hit a fresh July high of 113.45. 113.50 remains a strong resistance level heading into the London session.

With risk back en vogue, the crosses all extended gains, with the GBP/JPY topping 135.50 for an 80 pip move, and the AUD/JPY just falling short of the 78.70 mark after almost 65 pips of gains. The Aussie dollar was hampered by poor PPI data, which came in at 0.3% as opposed to the forecast of 1.2%. The disappointing results pulled the AUD/USD off of 0.8980 session highs to earlier pedestrian levels nearer to 0.8950, 25 pips off of the days low. Australian CPI on Wednesday will be a further gauge of the potential of a future RBA rate hike late. Elsewhere, the GBP/USD got above 1.5465 for session highs, and the USD/JPY rose to 87.70 but failed to break through that level after a few attempts. XAU/USD flirted with $1194.00 on a $5 move higher, and WTI/USD remained above the $79.00 per barrel level now that tropical storm Bonnie posed no threat to oil rigs in the Gulf of Mexico.

With a clean data schedule ahead today in the London session, you must look ahead to New York’s morning for New Home Sales at 10:00AM (EST).