The amount of nervous energy in today's FX market has already translated into some choppy, range-bound trading. The source is obviously the impending release of the EU bank stress test due to be issued at 16:00 GMT.

Today, German IFO data came in much stronger than expected spiking the EURUSD 40 pips rallying up to 1.2965. In the back of our minds, we remember that torrent of support risk-correlated trades gained on the release of the US stress test despite the market's criticism then. Nevertheless, we remain unconvinced that today's risk appetite will receive the same boost.

The EU stress test lacks the rigor of the US test and has lost enormous credibility based on the handling of the assignment. Swiss regulators highlighted this fact when the FT reported that they had conducted their own bank stress tests which were twice as stringent. The FT reported that the Swiss regulators conducted 13 different mega-risk scenarios including the collapse of the credit market and a drastic fall in GDP. I would suspect that investors will look at the Swiss test and feel kind of slighted when the actual EU tests & methodology are released.

As we have yet to see the actual report, the assumptions we're making are based solely off official statements and newswires, thus we may be proved incorrect. The most important factors for the release will be the credibility of the results, the transparency of information and the explanation of all assumptions made during the research.

According to the most recent reports, all vital banks (read: too big to fail) will pass including Germany's Landesbanken and all Greek banks. If all Greek banks are set to pass this test, something must be awry somewhere. To create the illusion of authenticity, the EU may throw a few minor banks under the bus. There are still significant EURUSD shorts lingering in the market and if the report is truly first-rate, we could see some heavy short covering and quickly.

In the UK this morning, the Office for National Statistics released their first estimate for Q2 GDP. The numbers came in much stronger than expected at 1.6%, exceeding the 1.1% consensus among economists and a -0.2% previous reading. The surprise number significantly decreases the probability of further QE by the BoE. Although an entire strategy cannot be based off one data point, the BoE's MPC will most likely focus more on inflation and less on growth in future meetings. Perhaps Mr. Sentence, the lone dissenter in the last meeting, may not have been too far off base after all.

Finally, the ECB's Trichet suggested that fiscal tighten was necessary around the globe and should not be delayed. The comment is in direct contrast to the Fed's view that some level of stimulus was still required, a point just reiterated by Bernanke this week. We don't expect any reaction in the USD, but it will be interesting to monitor because strict fiscal policy compounded by loose monetary policy should be extremely supportive for the underlying currency. Forex-Chart

Today's Key Issues (time in GMT): 07:30 EUR ITA Jul consumer confidence index, 103.9 exp; last 104.4. 08:00 EUR GER Jul Ifo sentiment index, 101.6 exp; last 101.8. 08:00 EUR GER Jul Ifo current conditions index, 101.7 exp; last 101.1. 08:00 EUR GER Jul Ifo expectations index, 101.6 exp; last 102.4. 08:00 EUR ITA May retail sales; last -0.3% m/m, -0.5% y/y. 08:30 GBP Q2 GDP - prelim, 0.6% q/q, 1.1% y/y exp; last 0.3%, -0.2%. 08:30 GBP Jun BBA mortgage lending data 16:00 EUR Stress Test results for individual banks expected start 17:00 EUR CEBS press conference regarding Stress Test results