FX.co ★ The euro and the British pound are counting on new highs. Investors should take a closer look at the Italian national debt

The euro continues to strengthen its position against the US dollar, as the decline in the number of cases of coronavirus infection in the US and significant progress in the deployment of the vaccine in the UK and the euro area have a positive impact on investor sentiment and put pressure on the dollar. Recently, the constant signals from the Federal Reserve that monetary policy will remain flexible even as inflation accelerates also do not help the dollar, which keeps the upward potential in the EURUSD and GBPUSD pair.

But before we talk about today's fundamental data and the prospects for the movement of the euro and the British pound, I want to make a small digression related to the Italian government debt, which has become in record demand among investors. During the last placement of 10-year Italian bonds, more than 110 billion euros were collected. It is worth noting that this is the first placement since Mario Draghi took the reins of power in his own hands as Prime Minister of Italy. The funds raised show how much investors will trust the new prime minister, who has proven the competence of his approach while still being the head of the European Central Bank. The volume of applications for the purchase of 10-year bonds exceeded the previous record of 108 billion euros, set in June 2020 after it became known that the European Central Bank and the European Commission plan to approve a new EU recovery and stabilization fund and raise about 900 billion euros under it.

Immediately after the news that Mario Draghi will be engaged in the recovery of the Italian economy, Italian bond yields fell to record lows. Experts note that the market may continue to move downwards in the wake of Draghi's arrival for some time, and the spread between German and Italian bond yields will narrow even more over the next six months. Let me remind you that the main task of Mario Draghi will be the formation of a government and the correct spending of funds from the EU reconstruction fund. Draghi will need to find a smart balance between high spending and saving the country from the coronavirus pandemic. The spread between Italian and German government debt is expected to narrow to 75 basis points in the near future, along with a flatter yield curve. Lower political uncertainty and support from the ECB create acceptable conditions for buying Italian government debt at the moment.

Now, as for the fundamental statistics, which helped the European currency to break above the monthly highs today. Investors' attention was focused on the report on the eurozone GDP in the 4th quarter of this year. The final result was better than the expectations and forecasts of economists. According to EU data from Eurostat, the eurozone economy contracted by 0.6% in the 4th quarter of 2020 compared to the previous quarter, while economists had expected a decline of 0.7%.

But it was not this that led to the growth of the euro, but the data on German economic expectations, which rose strongly in February this year. Let me remind you that the market is driven by leading data, and not by past statistics, from which it was already clear that nothing good should be expected from the eurozone economy at the end of 2020. A report from the ZEW Institute for Economic Research shows that the German economic expectations index rose to 71.2 points in February from 61.8 points in January this year. Economists had predicted that the indicator would be at the level of 59.8 points. Businesses are optimistic about the future as the German economy is expected to return to a growth trajectory over the next six months. But the assessment of the current economic situation in Germany has deteriorated somewhat. The indicator fell to -67.2 points in February against -66.4 points in January.

As for the technical picture of the EURUSD pair, so far everything is going according to the morning scenario: a break in the resistance of 1.2150 led to an increase in long positions in the euro, which retains the potential for further recovery in the area of 1.2190 and 1.2220. Bears are not yet willing to show themselves in the market, but in the case of a decline, you can still rely on the support level of 1.2110, just below which the larger support of 1.2070 passes.

As for the prospects of the British pound, a lot depends on whether buyers break through the level of 1.3955 or not. Only going beyond this range will open a direct path to new annual highs to the base of the 40th figure, just above which the resistance of 1.4040 is visible. It will be possible to talk about a downward correction only after the bears push the trading instrument below the base of the 39th figure, which will increase the pressure on the pair and lead to a test of the lows of 1.3860 and 1.3820. Customer demand is also reflected in the Commitment of Traders reports. According to the latest data, long non-profit positions rose from the level of 53,658 to the level of 60,513. At the same time, the short non-profit declined from the level of 44,042 to the level of 39,395. The non-profit net position rose to 21,118 from 9,616 a week earlier. The weekly closing price was 1.3745 against 1.3675. The fact that the bulls held their positions on such high volatility within the last week once again suggests that the pair is set to overcome the annual highs and quickly return to the area of the 40th figure.