On Thursday, the euro advanced slightly by 0.10% against the US dollar at 10:00 a.m. GMT, thus reaching the level of 1.0810.
The euro’s tendency towards gains on Thursday coincides with positive figures from the Italian labour market, which recorded an unexpected decline in the unemployment rate, as well as the Eurozone, and the best performance of the government bond auction there in four months.
The Italian economy has presented many surprises, outperforming the major economies of Germany and France, all of which are trying to stop the decline in their economic activities, get rid of negative sentiment, and restore growth.
While these economies need each other to support this trend. For example, manufacturing activity in Italy was unable to maintain the stability recorded in April and returned again to contraction this month as a result of, in addition to domestic demand conditions, weak export orders, according to the S&P Global PMI report.
The other main support for the single currency is the bond market in the Eurozone, which was facing difficult demand conditions as a result of the superiority of US Treasury bond yields, whether at the level of real or nominal yields. While Italian ten-year bond yields, adjusted for local or regional inflation, are the highest among their counterparts in the Eurozone and exceed those of US Treasuries.
On Thursday, we witnessed the best performance of the Italian ten-year government bond auctions since last January, with a coverage ratio of 1.5. This comes a week after German same-term bonds recorded their best auction this year with a coverage ratio of 2.8.
This improvement in demand for bonds in the Eurozone comes as markets anticipate the European Central Bank’s interest rate cut, which may begin next June. Therefore, investors may take advantage of the relatively high yields of these on-the-run bonds.
We also witnessed an unexpected decline in the unemployment rate in Italy from 7.1% to 6.9% last April, which was contrary to expectations that it would rise again to 7.3%. In the Eurozone, unemployment fell unexpectedly from 6.5% to 6.4%.
On the other hand, the most important negative factor facing the euro remains higher-for-longer interest rate, with markets still divided in their expectations as to whether the Fed will cut or hold next September and not even earlier than that, according to the CME FedWatch Tool.
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