The government in Rome has issued €8 billion worth of six-month bonds, and the yield on these bonds rose to 1.052%, up from 0.538% at the last six-month bond auction. The yield on a bond is essentially the cost of borrowing, so the increase in this cost for the Italian government indicates that investors view Italy as a higher risk prospect. This has dragged on the euro.
EUR/USD has dropped to a three-week low as traders feel the US economy is recovering faster than the eurozone. Yesterday the US announced a raft of positive economic data which boosted the US dollar. Dealers viewed the country’s strong homes sales and consumer confidence as a sign that the Federal Reserve will trim back its quantitative easing programme towards the end of the year.
At 1.30pm (London time), the final reading for first-quarter US GDP is released. If this report comes in below analysts’ 2.4% estimate, we could see traders switch to buying the euro versus the US dollar.