Neither stress test results nor unemployment figures stopped the bulls last week from driving the major indices higher. Forex traders also partied on certain currencies, as counterparts rallied against the U.S Dollar.

Trading was capped most of last week, as traders were preparing for a volatile Thursday and Friday. The BOE was the first to approach the stage, during Thursday’s session, releasing its interest rate decision for the month of May. Governor King and his administration decided to keep a firm 0.5% this time round, but mentioned that they might decide to buy £50 billion worth of assets, to help further stabilize the economic situation. The statement that followed the decision showed a fragile situation as comments showed that even though GDP had decreased sharply during the first quarter of 2009, the housing sector showed minor signs of an improving situation. Even though the central bank decided to refrain from taking any monetary action, the GBP/USD failed to maintain its strength as further comments showed that the Bank is quite uncertain as to when the U.K will make a full recovery.

Following the BOE’s decision the ECB provided the markets with a 0.25% rate cut, bringing its central rate down to 1%. Even though Trichet mentioned in his press conference that interest rates are not at their lowest point, investors saw an opportunity in the Euro, speculating that the economic situation might show slight improvement before hand, leaving the Euro-zone with a high rate differential compared to other economies. The EUR/USD rallied throughout the session receiving additional strength on Friday, as the Dollar significantly dropped lower.

Dollar Index Plunged

Already during Thursday’s session the Dollar index showed weakness as 10 out of 19 banks in the U.S showed that they will still have to receive further funding to help them increase their capital holdings. Even though the news troubled investors at first, officials from the Federal Reserve, including Timothy Geithner reassured their confidence, stating that the banking system shouldn’t have any further problems dealing with the current financial situation and that the stress tests results are only showing that the additional capital is required as reassurance, should the U.S economy receive another major blow.

The large names include: Regions Financial, GMAC, SunTrust, Keycorp, Bank of America, Citigroup, Fifth Third, Morgan Stanley, PNC and Wells Fargo. According to the results, those banks are in need for a further $74.6 Billion, to put them in the clear.

In addition, U.S unemployment had a major impact on Friday’s session as the number came out as expected at 8.9% while Non Farm Payrolls showed a -539,000 in April, much less than the expected drop of -600,000. One must note that even though the numbers seem very high, previous estimates are reckoning that the unemployment rate could reach a whopping double digit figure by the end of the year.

The Dollar index was battered during Friday’s session as it dropped below support of 84 points. As mentioned in previous reports, significant Dollar weakness on the index would lead to rapid movement on individual pairs. The EUR/USD presented a 200 pip intraday rally, following the unemployment data, one that coincided with a dramatic move on the index. The GBP/USD also made an astonishing turnaround, driven by overall momentum as it climbed higher to close the week above $1.5200.

Important Data is out the way

Last week’s data was a classed as a major test of relevant strength, as investors were expecting the Dollar to bounce higher on the bad economic data. Despite the gloomy outlook, the risk for appetite increased significantly across the board. Even though most of the currency pairs and the major indices still have major resistance levels to overcome, last week’s reaction to the market gave a green light on current trends as the bad data failed to stop the momentum and only drove the trend onto a stronger path. With minor data coming out this week, one should take into consideration that only a major economic event will most probably ruin the current trends and momentum.

Among the major data expected to be released is Ben Bernanke’s comments on Monday regarding the stress tests result. Even though the results have already been released to the public, the Fed Chairman’s comment will surely have its toll on the markets. In addition the BOE is expected to release its inflation report, while the U.S is scheduled to release it CPI figures on Friday. Inflation data will be closely watched by economists this week as most are still contemplating whether recent actions by officials will spark inflationary problems. When taking a glance at the Gold chart, known to be a safe haven against inflation, one can see that this precious metal is failing to drop like other commodities. 
 

Technical analysis

EUR/USD- Daily Chart

 
GBP/USD- Daily Chart

 
USD/JPY- Daily Chart