FX.co ★ European Central Bank tightens control over eurozone banks

While the European currency gradually corrects from its yearly highs against the US dollar, news emerged that the European Central Bank (ECB) has made one of the most significant interventions in stress testing for Eurozone banks. According to reports, banks asked to assess the impact of specific economic scenarios initially expected their overall capital ratio to decrease by around 3.5 percentage points in the worst-case scenario. However, the ECB adjusted this figure, resulting in a change in the final results by approximately 5 percentage points.

Recently, the ECB informed banks that passed the initial testing stage that the final results would be less optimistic. The discrepancies between the regulator and creditors underline the tension between them. Many are annoyed at the ECB's intrusive supervision, as bank managers strive to maximize profits for their shareholders by increasing payouts to investors. Nevertheless, the ECB's approach likely helped avoid a banking crisis this year, which occurred in the US in March and almost spilled over to Europe.

These so-called examinations, conducted every two years, provide a crucial assessment of banks' resilience to shocks and consider their capital needs. Now, following the March turmoil, the ECB deems it necessary to tighten stress tests, and hence the latest test was conducted using the most severe economic scenario to date. Even after the ECB's intervention, many creditors fared better than two years ago, thanks to increased profits and the positive impact of higher interest rates on lending income.

An ECB representative declined to comment, as did a representative from the European Banking Authority coordinating the stress tests. The results are planned to be published at the end of the month.

According to experts, the new test indeed included significant economic assumptions that strongly affected certain companies, especially those involved in commercial real estate lending.

As for the EUR/USD pair, bulls need to settle the price above 1.1165. This would open the way to 1.1215. From that level, further gains towards 1.1280 are possible, but achieving it without strong Eurozone statistics would be quite challenging. In case of a decline in the trading instrument, major buyers may act only near 1.1100. If there are no buyers at that level, it would be wise to wait for the pair to reach a low at 1.1060 or consider opening long positions from 1.1015.

As for the GBP/USD pair, demand for the pound remains rather sluggish. Expectations for the pair to rise can be entertained after gaining control above 1.2905, as reclaiming this range would strengthen hopes for a recovery towards 1.1960, and subsequently, a more significant surge to 1.3030. If the pair continues to fall, bears may attempt to take control below 1.2850. Achieving this would hit bullish positions and push the pair to the low at 1.2800 with a prospect of reaching 1.2760.