The widening gap between US and EMU events became even clearer this week. In Europe, macro data came surprisingly high in July’s PMI, but the main concern was obviously on the stress tests and their implications. The combination of “less bad” macro data and a powerful stress test is precisely what saved the US back in 2009.

This time around, however, on the other side of the Atlantic the focus remains on the much feared double dip.

Bernanke’s remarks on his Congress appearance corroborated that the Fed shares the view that risks are increasing. Bernanke refrained from saying what measures the Fed might take if a sharper slowdown were to happen, but his “greater than normal” uncertainty is clearly a reason to expect a more cautious Fed. We are revising our Fed forecast and now expect gradual increases in the funds rate in the third quarter of 2011.

Brazil’s central bank decision to hike by 50bp (instead of 75bp) and Banxico’s recent action suggests some countries in Latin America are aware of the convenience of not raising too early or too fast. In Asia, however, strong growth (as we expect in Korea next week) is still putting pressure to continue tightening.

Given the more uncertain outlook and low risk of inflation, the Fed will maintain low rates for a prolonged period of time. BBVA Research has pushed back its baseline forecast for the first fed funds rate hike to 3Q11 from 1Q11.

The euro has recently recovered much of the ground lost against the USD, but we consider recent euro strength a temporary factor, and our call is for a strengthening of the dollar in the medium-term.

The Central Bank adjusted the SELIC up by 50bps to 10.75%. This decision consolidates the view that monetary tightening cycle in Brazil is going to be softer than expected.

The euro reversed its earlier gains ahead of stress results on European banks due at 16:00 GMT after a newspaper mentioned that several Spanish savings banks failed tests which raised concerns that the financial system is still fragile and may be subject to other shocks.

The 16-nation currency advanced earlier today on optimism in markets after upbeat manufacturing and services data yesterday and the climb in German IFO business climate for July to the highest level since 2007 today.

On the other side, the dollar index, which tracks the dollar movements versus six major currencies, rebounded from a low of 82.20 to 82.83 while it touched a high of 83.02 in absence of data from the United States today.

Regarding the euro-dollar pair, it is showing decline on the daily and the 4-hour charts ahead of the stress test results. Meanwhile, the pair is trading at 1.2835 after visiting a high of 1.2964 and a low of 1.2791, while it is predicted to move between support and resistance at 1.2480 and 1.2890 respectively.

As for the sterling-dollar pair, it inclined today on the daily charts after the better than expected growth data which almost doubled analysts forecasts, where GDP for the second quarter surged to 1.1% from 0.3% in the first quarter.  However, the pound retreated after reaching a high of 1.5448 to 1.5380, where it is currently trading. The pair touched a low of 1.5249 earlier today, whereas it is expected to move between support at 1.5310 and resistance at 1.5455.

Concerning the dollar-yen pair, it inclined slightly on the daily charts, but facing downside pressure from the 4-hour and 1-hour charts. For now, the pair is trading at 87.22, recording a high of 87.46 and a low of 86.71, whereas support is seen at 86.95 while resistance is at 86.60 then 87.70.