The Euro is foreseen to continue receiving a lift after European Central Bank President Mario Draghi dampened talk of further rate cuts yesterday by expressing confidence that Euro Zone economy is on the road to recovery. Meanwhile, a strong auction yesterday pushed Spanish yields to 10-month lows in a sign of improving investor confidence.
The ECB has dashed hopes of further stimulus to pull the Euro Zone out of recession and fight record unemployment, suggesting confidence that the economy is strong enough to heal itself. The central bank unanimously held interest rates at a record low of 0.75 percent yesterday, saying the Euro Zone economy will recover later in 2013 as encouraging signs of stabilization have already emerged. Speaking to reporters, Draghi expressed that Europe has turned a corner in the crisis, with borrowing costs across the region significantly lower, stock markets on a high, and volatility at a historical minimum. Likewise, Draghi boasted of strong capital inflows in the Euro area.
Just a month ago, Draghi revealed that the bank held a wide discussion on interest rates before opting to keep them on hold, suggesting some members favored a rate cut. Gross Domestic Product has failed to expand since the third quarter of 2011, and economists expect it to have dipped sharply in Q4. Nevertheless, Draghi said the improved health of the financial markets should work its way through to the economy and that global demand should strengthen, boosting export growth. According to analysts, Draghi made it clear that no further stimulus measures should be expected from them, providing a healthy boost to the single currency.
The central bank chief also stressed that the effects of its bond-purchase plan on the markets were more powerful than what rate cuts could have achieved. Reflecting this positive sentiment, Madrid kicked off its challenging 2013 funding program with a strongly-bid auction of mostly two-year debt yesterday. Spanish ten-year bond yields fell below 5 percent for the first time since March after the government sold nearly 6 Billion Euros of bonds, more than the 4 to 5 Billion Euros amount targeted. With no new economic data due today, buoyant sentiment from yesterday is deemed to carry over into today’s European trades. As such, a long position is advised for the EUR/USD.
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