The euro managed to push out to its highest level in around a month this morning, aided by continued optimism that ECB action was likely in September.
EUR/USD remains above the $1.24 mark, on hopes that the central bank is preparing to step in and ease borrowing costs for Italy and Spain. Once again it is Mario Draghi’s rhetoric, rather than any sign of concrete action, that is keeping the euro in positive territory. The main obstacle to any bond-buying is Madrid, which needs to formally request aid in order for the ECB to step in. It seems that Prime Minister Rajoy is slowing edging towards a bailout, having previously been firmly against an official request for help.
Once the request comes in, the expectation is that the ECB will move, stepping in to purchase sovereign debt issued by Madrid to make up for the shortfall in demand that has seen yields edge higher during the summer months. A drop in Italian industrial output and news of yet another contraction in Italian GDP reminds us that there are other issues besides Madrid, but we are likely to see the same chain of events with regard to Rome, namely a formal request before bond purchases begin in earnest.