Risk FX continued to power higher with EUR/USD approaching the key 1.2500 barrier in mid morning North American trade. Sentiment towards the euro has improved markedly as market consensus is coalescing around a possible plan by the ECB to put a cap on peripheral bond spreads which would ease the financing problems of Club Med economies.

Today the euro received a boost as reports that the German government and their member of the ECB managing board are in favor of the ECB bond buying plan that would temper debt service costs for Italy and Spain. Italian and Spanish yields have declined since reaching fresh peaks earlier this month contributing to a much more constructive tone in the EURUSD.

As we noted earlier, “In order for euro to make further progress to the upside German policymakers have to show some acceptance of the ECB proposal to cap periphery rates. So far they have been reluctant to do so, but if the market begins to sense that Germany will not block any ECB action even if it doesn’t approve it then the euro could push higher as credit concerns ease further.”

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