Monday was a quiet day in the currency market. Because of Columbus Day in the United States, banks were closed, so the foreign exchange market did not move much.
But during the US session, the euro pairs spiked higher briefly. They all reacted to the news that Germany, the biggest European economy, will support joint issuance of EU debt to tackle the European energy crisis.
So is it now a good time to buy the common currency?
The big news out of Germany led to tighter spreadsThe common currency reacted to the news, but the move quickly faded. However, the bond market was much more receptible and properly understood the announcement’s significance.
As a result, the spread between the Italian and German bonds tightened, which is typically good news for the euro. Wider spreads mean a higher borrowing cost, and tighter spreads mean the opposite.
🇮🇹🇪🇺 Massive outperformance of Italian BTP while core rates are selling off. Maybe it's not the ECB, but Germany that will fly to the rescue. https://t.co/t5vNlmS1ZS pic.twitter.com/fyq0Zq964G
— Frederik Ducrozet (@fwred) October 10, 2022Europe faces a harsh winter as the energy crisis triggered by Russia’s invasion of Ukraine affects everyone. Moreover, inflation seems out of control as the European Central Bank lags behind other central banks in the race to tighten financial conditions.
Therefore, such news might be just the trigger for an upside move for the euro pairs. The EUR/USD exchange rate, in particular, was hit hard by the war in Europe and the strength of the US dollar.
After recovering to parity last week, it was aggressively sold before and after the Non-Farm Payrolls report last Friday. However, yesterday’s news is a big deal and should support the euro if spreads continue to tighten.
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