Should you buy the euro on news of joint issuance of EU debt?
- Euro pairs bounced yesterday on the news of Germany supporting joint issuance of EU debt
- The EUR/USD exchange rate was rejected at parity before the September NFP report
- Italian-Germany spread tightened as the bond market reacted positively to the news
Monday was a quiet day in the currency market. Because of Columbus Day in the United States, banks were closed, so the foreign exchange market did not move much.
But during the US session, the euro pairs spiked higher briefly. They all reacted to the news that Germany, the biggest European economy, will support joint issuance of EU debt to tackle the European energy crisis.
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So is it now a good time to buy the common currency?
The big news out of Germany led to tighter spreads
The common currency reacted to the news, but the move quickly faded. However, the bond market was much more receptible and properly understood the announcement’s significance.
As a result, the spread between the Italian and German bonds tightened, which is typically good news for the euro. Wider spreads mean a higher borrowing cost, and tighter spreads mean the opposite.
Europe faces a harsh winter as the energy crisis triggered by Russia’s invasion of Ukraine affects everyone. Moreover, inflation seems out of control as the European Central Bank lags behind other central banks in the race to tighten financial conditions.
Therefore, such news might be just the trigger for an upside move for the euro pairs. The EUR/USD exchange rate, in particular, was hit hard by the war in Europe and the strength of the US dollar.
After recovering to parity last week, it was aggressively sold before and after the Non-Farm Payrolls report last Friday. However, yesterday’s news is a big deal and should support the euro if spreads continue to tighten.