USD supply has lifted EUR/USD back towards Friday's highest levels this morning.  The higher levels of Euribor in recent sessions combined with talk that the US economy could be on the brink of a double dip recession are having a positive impact on the EUR. Whether or not the EUR can extend these gains from current levels this week depends on the overall level of risk aversion.  The better tone of stocks in both Asian and European hours this morning weighs in favour of the EUR.  That said the results of stress tests on Europe's banks are likely to be a thorn in the side of the EUR going forward.  These results are due to be published later in the summer.  Reassurances from French Finance Minister over the health of French banks and comments from EU Commissioner Rehn that the EU has a support plan for banks that fail stress tests may have moderated some of these fears this morning but anxiety levels over these tests are set to stay high.  Medium-term concerns about the pace of the global economic recovery should be sufficient to undermine risk aversion suggesting that the EUR is likely to see renewed selling pressure.

The recovery in Chinese stocks this morning implies an improvement in risk appetite, a move mirrored by the softer tone of the JPY.  While a correction in Chinese stocks may have been due there is plenty of evidence to suggest that the Chinese industrial sector is slowing and this should keep the Asian market's anxious about the pace of economic growth going forward.  In the US, there is yet insufficient evidence to suggest that a double dip is a done deal.  That said there are clear signs that the recovery is losing momentum and this too should keep investors nervous about extending risky positions.  Near-term gains in EUR/USD could thus prove to be good selling opportunities.  

As expected the RBA kept interest rates on hold last night.  The overall tone of the RBA's statement was supportive for the AUD.  The RBA predicted that inflation would stay close to the top of its 2-3% target band and it referred to the expansion in consumer spending and business investment.   Adding to the good news for the AUD was the better than expected May AUD1.65 bln trade surplus; this lifted by Asian demand for coal and gold.   AUD/USD pushed towards the 0.8500 level on the news before sellers took a hold.  In spite of today's better tone, the AUD will remain sensitive to news regarding the pace of Chinese demand.  This suggests that AUD/USD will struggle to regain recent highs.  If EUR/USD does see renewed losses this summer, risk is that AUD/USD will fall again too.  

Concerns about the economic impact of budget cuts continue to worry the pound.  The latest BCC survey has highlighted the risk of sluggish growth in the services sector which plays on yesterday's weak services PMI data.  EUR/GBP has traded close to yesterday's closing levels, with no official UK data released this morning. 

US ISM non-manufacturing and ABC consumer confidence data are due today.

Jane FoleyResearch DirectorFOREX.comjfoley@forex.com+44 207 398 5024