We get our first view today at the methodology behind the stress tests currently being applied to European banks to assess their health.The markets reaction will not be instant due to the expected weighty tome of equations and statistics to wade through. However, there is a key point worth noting in advance.

Analysts will be looking for the models to incorporate large haircuts on holdings of Greek bonds, maybe 30 pence in the pound and similar (but not as severe) on other periphery Eurozone countries bonds.

If, as the Financial Times suggests, the haircut in the models is significantly less than 30 per cent, the credibility of the tests and as such the banks they are testing will be completely undermined.

The whole point of these tests is to restore confidence into the banking system so it is vital that the methodology is perceived as credible. We can then wait with baited breath rather than indifference, for the results of the tests on 23rd of July.

The Dollar gave up further ground to Sterling and Euro on the back of the disappointing employment data from the US on Friday.

However, the Forex market is either ignoring or completely in the dark about when Mr Obama will begin to tackle the US budget deficit (I think it may be a combination of both). Currently running at over 9% of GDP, it seems some in the US are unwilling to implement similar austerity measures to those in the UK to tackle the deficit.

And since the US makes up such a large slice of world demand, any budget cuts and the time scale over which they are implemented will have wide reaching implications for its main trading partners, China, The UK and the Eurozone and also for the Dollar over the coming months.

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