There is plenty of talk this morning that the USD is vulnerable if Fed Chairman Bernanke softens his outlook for the US economy at his testimony this afternoon.  However, the fact that the USD index is this morning trading 6.7% below its June 2010 high should soften any negative reaction.  Last week's FOMC meeting already reawakened the prospect that the Fed could ease policy again before it hikes rates and cemented the view that no Fed tightening is due until well into 2011.  As it stands US data has been showing clear signs of losing momentum.  However, fears of a double dip recession currently appear to be overdone.  Bernanke is likely to retain a cautious outlook on the economy but is it quite likely that he will not aggravate fears of double-dip.  This suggests that the USD could hold its own during today's testimony.

EUR/USD has continued to weaken this morning reaching an intraday low of USD1.2821.  Questions continue to be asked as to the credibility of the EU bank stress tests.   The integrity of a procedure that was deemed to be both rigorous and transparent would be expected to shine through.  Yet various EU officials continue to feel the need to talk up the validity of these tests.  The French Finance minister this morning spoke of total confidence on the French stress test results and Chancellor Merkel determined that the stress tests will restore faith in the banking sector.  The market will wait for the results to be published before making up its mind (the main list is due on July 23).  Too few failure and the tests will be deemed to be a white wash, too many and the EUR's could see renewed selling pressure.  There may be a delicate balance in which the tests are considered sufficiently rigorous and the banking sector sufficiently healthy to persuade the EUR to push higher.  That said, it is clear that EUR/UD 1.300 is tough resistance.  

The minutes of the June BoE MPC meeting showed that once again Sentance voted for a rate hike.  In contrast to a month ago this news failed to underpin the pound.  Sterling softened on the release of minutes on the news that the MPC suspected that the medium-term outlook for GDP may have weakened and that the majority expected that spare capacity would lower medium-term CPI.  While the MPC acknowledged that near-term inflation prospects had worsened, since the meeting data has shown a moderation in earnings growth and another decline in headline CPI.  Cable is currently holding just below last night's close.  EUIR/GBP has pushed lower on the back of the weaker EUR.The Japanese government retained its overall economic assessment this month having raised it in June.  The BoJ commented that upside/downside risks were balanced and suggested that the BoJ will not change policy based on the level of the yen.  That said, Trade Minister Naoshima said that yen gains are hurting the economy.  While these comments should keep speculation alive that the MoF may order intervention in USDJPY, this is not a decision that will be taken hastily.  Despite the huge importance of the USD/JPY exchange rate for the Japanese economy, its position has been diluted moderately in recent years by the increasing importance of Asia as an export partner.  Japanese exports to Asia this year have continued to grow at a rapid rate.  If risk appetite worsens USD/JPY is likely to fall further.  

CAD/USD continued its fall into the London open.  Buyers emerged at the 1.0360 area.  The better tone in the CAD helped lift the AUD, though AUD/USD has returned to last night's closing levels.  

Aside from Bernanke's testimony, the continuation of earnings season and UUS MBA mortgage applications data will provide a focus.  

Jane FoleyResearch 207 398 5024