On a week when the results of the European bank stress tests are due, and on the back of the single currency’s best week in over a year, the last thing the politicians needed was something to puncture that mood, however Hungary provided it after the IMF and the European Union withdrew a €20bn financing deal over the weekend in response to concerns over the Hungarian governments budget plans.

If a warning were needed of the problems facing Europe this is a stark reminder and will do nothing to assuage investor concerns about the problems Europe has with respect to sovereign debt.

The recent shift in focus towards the problems in the US doesn’t change the fact that the recent optimism with respect to the results of Friday’s stress tests could well be misplaced, given concerns about the stringency of the criteria being adopted to assess the banks financial health.

Anyone who thinks that the euro’s problems are now over only needs to look at Hungary and the recent rally actually does nothing to resolve these problems in the peripheral countries, as it makes them all less competitive from an export point of view.

In the UK recent housing data released by Rightmove has shown that house prices appear to have peaked, as month on month house prices declined by 0.6% in July.

With no UK data of note until tomorrow when the latest public finance figures are released, the pound will in all likelihood remain somewhat sidelined until Friday where the first release of Q2 GDP should indicate that the economy grew by as much as 0.6%, while we will have to wait until tomorrow for the first data release of the week in the US where the latest housing data is expected to make grim reading.

Today’s events are likely to be dominated by the situation in Hungary with the focus very much on the single currency, and whether it can continue its recent good run.

EUR/USD – having touched 1.3000 at the end of last week the next price objective in the medium term lies at 1.3125 which is the 38.2% retracement of the down move from the highs at 1.5145 to the 1.1880 lows.

The single currency should find support around 1.2880, while a break below here would target a deeper correction back towards the 1.2750/60 area.

GBP/USD – the correction lower on Friday was not good news for the firmer sterling scenario, failing just short of the April highs above 1.5500 at 1.5475. It is however not completely ruled out as long as we stay above the 1.5230/40 level which acted as quite strong resistance on a number of occasions in the last 2 weeks.

A daily close above 1.5345 would signal a test toward 1.5610 which is the 61.8% retracement of the down move from the 2010 peaks at 1.6460 to the lows at 1.4230.

EUR/GBP – the unexpected break above the 0.8400 level throws into doubt our lower euro scenario and now targets the 0.8520 level.

The 0.8400/10 area should now act as significant support for this move higher. Any move below the 0.8400/10 re-targets the 0.8320/30 level.

USD/JPY – the yen continues to benefit from a double whammy of sliding dollar yields as well as diminished risk appetite after it broke below its June lows at 86.95 on Friday. This break below these lows now opens up the risk of a move to last year’s yen lows at 84.80, a break of which would open up levels last seen in 1995.

Any rallies would need to overcome the pivotal 88.00/10 area to stabilise and re-target 89.20, a break of which would re-target the 90.00 area.

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Article by Michael Hewson, Analyst, CMC Markets.

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