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Traders bought the euro after the cost of borrowing for the Italian and German governments dropped. The yields on ten-year bonds fell to 4.11% and 1.71% for Italy and Germany respectively. As the yield on a bond is effectively the cost of borrowing, a reduction suggests that investors have more confidence in the ability of the government concerned to repay its debts. Consequently, the euro was pushed higher after the details of today’s auctions were announced.
Most traders are now sitting on their hands ahead of an announcement from the Federal Reserve at 6pm. It is unlikely that tapering of the bond-buying scheme will be on the cards, as the US economy received a setback during the recent partial shutdown.
Traders will be listening out for clues about how positive or weak the Fed’s outlook for the US economy is. If the Fed is dovish tonight we could break the recent high of $1.3833 and, as Brenda Kelly explained on Monday, this could set EUR/USD on a path to $1.4.