The euro lost some ground on Tuesday, a day after short-covering helped it pull away from two-month lows against the dollar, and remained vulnerable ahead of a Spanish bond auction as euro zone debt jitters showed no signs of abating.
Spain is set to see its borrowing costs leap when it sells short-term bonds after concerns over its deficit and banking sector pushed longer term risk premiums above 6 percent and drove the cost of insuring its debt to a record high.
The common currency shed 0.2 percent to $1.3115, having aggressively pulled away from a nadir at $1.2995. Traders cited macro and option related buy interest supporting it around the base of the daily Ichimoku cloud at 1.3056.
"There's a lot uncertainty about Spanish yields, so of course if something goes off script at the auction today the euro may come under pressure again," said Bank of Tokyo-Mitsubishi UFJ analyst Teppei Ino.
"That said, the support around $1.30 is very strong and it held overnight, so I would expect the currency won't be able to break it just yet."
Traders said there were stop-loss sell orders below $1.2970 and were eyeing further support at $1.2954, around the 61.8 percent retracement of the euro's climb from its January low to a peak in February.
The influential ZEW German sentiment index due at 5 a.m. Eastern Time could also have some effect on the euro in the event-packed day. It is seen dropping, to 20.0, from 22.3 in March - its highest level since June 2010.
"Even if ZEW comes well above expectations, it's really hard to find a reason to happily buy the euro at these levels, especially ahead of another Spanish auction" said Koji Fukaya, chief currency strategist in Credit Suisse in Tokyo.
Spain holds auctions of two-year and 10-year bonds on Thursday. Any sign that 10-year yields are heading closer to 7 percent - a level regarded as unsustainable - could prompt further euro weakness.
Compounding Spain's fiscal woes, its banks borrowed a record 316.3 billion euros ($412 billion) from the ECB in March, almost double the previous month's total, as they remained virtually excluded from wholesale credit markets.
"Investors are beginning to question if Spain's fiscal austerity measures could be sustainable as its economy deteriorates, while sluggish growth would push housing prices lower and raise the risk of nonperforming loans ballooning," said Takao Hattori, senior investment strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
Against the yen, the euro was steady at 105.56 yen, having hit the trough of 104.63 yen on Monday, a level not seen since mid-February.
AUSTRALIAN RATE CUT AHEAD?
Commodity currencies were slightly lower after Reserve Bank of Australia policy meeting minutes showed it would consider cutting rates in May if data due next week confirmed a benign inflation outlook.
The Australian dollar fetched $1.0333, down 0.2 percent on the day, with support seen around 1.0310, while the New Zealand dollar was down 0.4 percent at $0.8165.
Figures on inflation for the first quarter are due on April 24 and are expected to show annual underlying inflation remained in the middle of the RBA's 2 to 3 percent target band.
This is why the markets are now pricing in a 90 percent chance of a 25 basis point easing at the May 1 meeting.
With risk aversion back in force, market players bought back the yen, driving the dollar down to a seven-week low of 80.29, before it recovered slightly to last stand at 80.46 yen.
While many market players had expected the dollar to stay above 80 yen due to expectations of further monetary easing by the Bank of Japan later this month, some now see a greater likelihood of short-covering in the yen as data showed last week speculators' net yen short positions remained near five-year high.
After a mixed bag of U.S. data had no lasting impact on the greenback on Monday, investors wait for more cues about the global economy in the U.S. housing data and industrial output for March due at 8:30 a.m. Eastern Time and 9:15 a.m. Eastern Time respectively.
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