EUR/USD: Positive Headlines Buoying the Euro

The Euro is foreseen to gain opposite the US dollar today on views that efforts to resolve the lingering debt turmoil are gaining ground. Positive headlines are seen to provide the single currency a lift, with the European Commission agreeing to bail out four Spanish banks as part of a rescue plan and Italian yields falling to pre-crisis levels. Meanwhile, rekindled hopes of a deal by the US Congress to avert the fiscal cliff are also believed to improve sentiment today.

European Union regulators gave the green light to 37 Billion Euros in funding for Spain’s stricken banking sector, setting in motion a long-term clean-up of the sector. In exchange, however, four nationalized banks agreed to make sharp cuts in their balance sheets and payrolls, carrying the risk of intensifying Spain’s credit crunch. According to the EU, the funds and restructuring are aimed at helping the banking sector absorb losses from the collapse of a real-estate boom. Defending the move, EU Competition Commissioner Joaquin Alumnia said that restoring a healthier financial sector capable of financing the real economy is indispensable for economic recovery in the country. The 37 Billion Euro aid is the first and largest chunk of a 100 Billion Euro rescue line of credit for Spanish banks approved last June.

Meanwhile, in a sign that investor anxiety over the debt crisis has receded considerably, Italian bond yields fell to low levels yesterday. Italy sold 7.5 Billion Euros of six-month bills, the maximum amount set for the auction, at the lowest yields on a similar note in more than two and a half years. Yields came in at 0.919 percent, the lowest they have been since April 2010 and down from 1.347 percent at the last auction on October 29. Investors bid for 1.65 times the amount on offer, better than 1.52 times last month. The country’s 10-year yield also dropped 6 basis points to 4.67 percent, the lowest level since June 2011. Italy returns to the market today with an auction of as much as 6 Billion Euros worth of five and ten-year bonds. Should another buoyant auction take place today, the Euro is seen to incline further. A deal on the next tranche of Greek aid and the underlying support pledged by the European Central Bank have likely emboldened investors to increase demand.

Perceived positive developments on US budget talks are also seen to wield upward pressure on the Euro-Dollar. US House Speaker John Boehner, the top Republican in Congress, expressed optimism that Republicans could reach a deal with the White House to avert a fiscal crisis, despite repeating opposition to raising income tax rates on the wealthy. US President Barack Obama also extended the optimism, saying that he hopes to reach a breakthrough with Congress before Christmas. Considering these, a long position is advised for the EUR/USD trades today.

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