Spurred on by successful bond auctions in Spain and Italy, which led to a fall in euro zone periphery bond yields, the euro broke through key resistance at $1.2820 versus the dollar yesterday as traders moved to cover some short positions. It saw further gains overnight, rising as high as $1.2878 in early morning trade. There was also a positive reaction to comments from the chief executive of French bank Societe Generale that a deal with private creditors to voluntarily write down at least half the value of their Greek sovereign bonds has a good chance of happening in the coming days.

There are also reports that European states have reached an outline agreement on a pact to reinforce fiscal discipline. A new legal draft will be submitted to finance ministers from the countries concerned when they meet in Brussels on January 24. While sentiment toward the euro has certainly improved over the past 24 hours, investors are likely to be hesitant to bid the single currency too high as they awaited the results of another Italian bond auction today. Meanwhile, stock markets were mostly higher overnight, also cheered by the news of successful debt auctions and following the ECB’s decision to leave interest rates unchanged, suggesting officials are not overly worried about the health of the euro-zone economy. Governing council member Erkki Liikanen was quoted this morning as saying that although the economy has weakened, it is showing some signs of stabilisation at these low levels.