1. Italy Sells Bills, EUR/USD Finds Support

The European sovereign debt market continues to show stabilization as successful auctions give the EUR a lift.

From Financial Times: Italy sold its full target of €11bn of short-term treasury bills at sharply lower yields, underscoring the marked improvement in investor sentiment towards the world's third-largest bond market, and nurturing hopes that Europe may have turned the corner.

The Italian treasury sold €8bn of six-month bills at a yield of 1.969 per cent, the lowest at an auction since May and down sharply from the 3.251 per cent the country had to offer for similar bills at the last auction on December 28. Italy also sold €3bn of one-year bills at a rate of 2.214 per cent.

After shaving off some of Tuesday's rally, the EUR/USD managed to find support overnight at the 1.3070 area.

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For a technical analysis view of EUR/USD, see today's technical update: EUR/USD Bounces off 1.3077 Pivot; Bullish Momentum Intact with Room to 1.32

2. Optimism Increases over Greek Debt Deal

Also, the market is beginning to again price in the successful completion of the debt negotiations between Greece and its private bondholders. The latest person to say an agreement is close is the EC's Ollie Rehn.

width=378From Financial Times: Olli Rehn, European commissioner responsible for economic and monetary affairs, said on Friday that talks with representatives of holders of some €200bn of Greek bonds were close to a deal.

Speaking on a panel with the French and German Finance ministers at the World Economic Forum in Davos, Mr Rehn said: We're just about to close a deal on private sector involvement between the Greek government and the private-sector community. Preferably, still in January rather than February.

According to people with knowledge of the proposal, the co-heads of the bondholders' committee negotiating with Greece, Charles Dallara and Jean Lemierre, could make concessions on interest rates for new bonds that would mean higher losses for private investors, but which could be recouped if the country returns to strong growth.

3. USD Weaker as Traders Try to Price in Chances of QE3

Signs that the world's largest economy ended 2011 on a solid note would be a sigh of relief for investors worried about Europe being in recession and slowdowns last year in emerging markets. However, estimates have come down for the US' 4Q growth in recent weeks.

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From Wall Street Journal: U.S. [economic] data has become unusually important for U.S. dollar exchange rate developments-as only good data seem to be able to prevent the Fed from rapidly implementing QE3, said Ulrich Leuchtmann, a currency strategist at Commerzbank.

As Fed chairman Ben Bernanke left the door wide open for QE3 we would probably need to see a GDP figure above 3.3%...to provide positive momentum to the dollar, he said.

Nick Nasad is the Chief Market Analyst at IBTrade and FXTimes  - provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.

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