Forex Market Review – Euro gains on improved economic data and successful debt auctions

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Euro extended gains into the European session, rising on improved risk appetite this Tuesday due to some positive economic data. Earlier in the day, China growth data reported better than expected GDP numbers, while Germany’s ZEW economic sentiment data also surprisingly beat forecasts.

Additionally, Spain held a successful Treasury-bill auction today and the EFSF, Europe’s rescue fund, sold more than its target at a bill auction. Spain sold 4.88 billion euros in treasury bills at lower yields which showed that the extra liquidity provided to euro zone banks by the ECB in December is indirectly helping to bring down sovereign borrowing costs. The EFSF six-month Treasury bill auction was also three times oversubscribed, despite Standard & Poor’s downgrading Monday of its credit rating.

EURUSD surged to a high of 1.2806 from the European session open of 1.2725. On the day so far, euro gained over 1 percent against the dollar. However, the single currency remains vulnerable and gains may be limited as the risk of a prolonged debt crisis still exists until policymakers offer a convincing solution to solve it. Talks in Greece on a debt swap deal are still in progress after reaching a deadlock on Friday. Data today also showed euro-zone inflation slowing in December, raising the chances of another rate cut from the ECB.

Sterling was on the upside against the dollar and then yen due to increased risk appetite. The pound was not affected much by the UK consumer-price inflation numbers for December, which showed the biggest month-to-month decline since April 2009. GBPUSD rose to a session high of 1.5402 from the Asian session low of 1.5308.

Further upward momentum could stall if speculation is that inflation could fall further as this could persuade the Bank of England to ease policy in February, which will weaken the pound.

Yen weakened against the euro. EURJPY rose to 98.30 from 97.13. The dollar recovered some losses after touching its lowest level since November and USDJPY rose back up  to 76.82 from 76.54.