The euro edged higher today and looked set to break a six-week losing streak, supported by a drop in Italian bond yields after a revived coalition deal between two anti-establishment parties pulled the country back from snap elections.
With worries that political turmoil in Italy would roil markets receding, investors have - after strong inflation data this week - shifted their focus back to predicting when will the European Central Bank raise interest rates.
Annual inflation in the 19 countries sharing the euro rose to 1.9% in May from 1.2% in April, well above expectations for a 1.6% increase.
Analysts said that after the rollercoaster ride in the euro this week, markets are back to focusing on fundamentals and the inflation data will give food for thought to those who are betting on a sustained euro decline.
The single currency edged 0.2% higher to $1.1710 today. On a weekly basis, it is set to climb 0.5%, breaking a six-week losing streak.
The euro plunged earlier in the week and Italian bond yields soared, with two-year yields posting their biggest one-day jump in 26 years on Tuesday, on fears that fresh elections in the euro zone's third biggest economy could strengthen the hand of the anti-establishment parties there.
But the past two days have seen some stability with the euro recouping losses thanks in part to renewed efforts to form a government.
A new government in Spain, with the leader of the Spanish Socialist party Pedro Sanchez becoming prime minister, was greeted with relative calm in currency and bond markets.
Investors were also getting more cautious about the dollar's recent move higher - it hit a six and a half month high against a basket of its rivals earlier this week - on trade war fears and rising concerns the US economic momentum may soften.
Risk appetite was muted after the Trump administration slapped tariffs on steel and aluminium imports from the EU, Mexico and Canada, raising risks of a full-blown trade war.
Canada and Mexico retaliated against the US decision while the European Union had its own reprisals ready to go.
