The euro improved on Tuesday morning following positive news that Italy had finally formed a government in the wake of February's inconclusive elections which left the nation without leadership.

The common currency ticked up to $1.31 on Tuesday morning after Italian stocks rocketed on Monday in response to the new Italian Prime Minister Enrico Letta's naming of a coalition on Saturday.

However, gains from relief in Italy were mitigated by speculation that the European Central Bank will cut its interest rate on Thursday following a string of poor data. Members of the bank made statements over the past week indicating if data showed the economy was still declining, they would consider lowering interest rates.

The financial strain that used to be contained within the southern rim of the eurozone seems to be spreading to more powerful core countries like Germany, the region's largest economy. On Monday, data showing that economic confidence in the eurozone was slipping faster than expected caused concern among investors.

According to Bloomberg, consumer sentiment fell to 88.6 from 90.1 in March; its lowest level since December. The figure came in even lower than pessimistic forecasts, which predicted seeing sentiment fall to 88.9.

More concerning was a larger than expected drop in business confidence and investor sentiment in Germany. The news added to a growing collection of disappointing data that suggests the eurozone is weathering the longest recession on record.

ECB President Mario Draghi told investors he was expecting to see growth in the second quarter, something many are beginning to doubt. Draghi and the region's Finance Ministers are expected to consider both interest rate cuts and policy changes in order to fulfill Draghi's predictions.

Though a rate cut will likely bring the euro down, many analysts are expecting the currency to rally shortly after. Lowering interest rates will be seen as a move to spur on the eurozone economy; so although it will initially weigh the currency down, it could prop it up in the long run.

(c) 2013 Benzinga does not provide investment advice. All rights reserved.


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