The euro approached a one-month high this morning, before paring all of its gains by mid-afternoon, following disappointing US durable goods data.
EUR/USD was up 33 pips at $1.3350 by midday (London time), after Italian prime minister Mario Monti downplayed Spain’s contagion risk, saying that debt woes are ‘almost over’. ‘Contagion as a whole, I hope, will soon belong to the past now that more discipline has been adhered to by most member states, and now that the firewalls are being in the process of being fortified,’Mr Monti said today. 'You all know that the eurozone has gone through a crisis, a huge crisis. I believe this crisis is now almost over.'
Mr Monti’s comments, together with evidence of another successful Italian bond auction, temporarily revived risk appetite this morning. Italy auctioned off €8.5 billion of 182-day Treasury bills at an average yield of 1.119%, the lowest rate in more than a year. That’s lower than the average yield of 1.202% at a previous auction of similar securities. Also encouraging was an increase in the bid-to-cover ratio, which rose to 1.51x, exceeding 1.36x at a similar auction last month. Mr Monti is implementing a €20 billion package of spending cuts and tax increases to eliminate the budget deficit. His efforts seem to be restoring confidence in Italy’s debt, which is naturally a very positive sign. Also benefiting the euro this morning was a stronger German CPI figure and higher-than-expected Italian business confidence index.
However, market sentiment was hit by lacklustre US durable goods data, which rose less than expected in February, although sales of cars and technology remained robust. The US durable goods orders came in at 2.2%. Although this was much better than the prior month’s decline of 3.6%, it was much lower than expectations for a 3% gain. Looking ahead, euro area finance ministers will meet on Friday to discuss the possibility of raising the total capacity of Europe’s bailout fund. German chancellor Angela Merkel earlier this week said her country may back plans for Europe’s temporary and permanent rescue funds to run in parallel. According to current consensus, European governments are likely to boost the limit on the rescue fund to between €700 billion and €940 billion.EUR/USD may encounter some resistance at the February high of $1.3487. The currency pair should find short-term support between $1.3175 and $1.3140.
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