EUR/USD higher after Italian bond auction

The euro was higher against the dollar on Wednesday after an auction of Italian five and 10-year government bonds met with solid investor demand, but saw borrowing costs rise sharply.

EUR/USD hit 1.3122 during European afternoon trade, the pair’s highest since Monday; the pair subsequently consolidated at 1.3105, gaining 0.33%.

The pair was likely to find support at 1.3017, Tuesday’s low and a seven-week low and resistance at 1.3070.

Italy sold the full targeted amount of EUR6.5 billion two days after Italian elections ended with no party in control of the Senate, raising the prospect of a prolonged period of political instability and potentially reigniting the crisis in the euro zone.

The yield on Italian 10-year bonds rose to 4.83%, up from 4.17% at a similar auction last month, while the yield on five-year bonds climbed to 3.59% from 2.94% in January.

Sentiment on the euro remained subdued as investors awaited political developments in Italy, amid concerns over whether a government can be formed.

Investors were also looking ahead to a second day of Congressional testimony by Federal Reserve Chairman Ben Bernanke later in the trading day. Bernanke defended the bank's easing program on Tuesday, saying that the benefits outweighed the possible costs.

Elsewhere, the euro was higher against the pound, with EUR/GBP rising 0.23% and was little changed against the yen, with EUR/JPY dipping 0.03% to 120.10.

Earlier Wednesday, official data confirmed that the U.K.’s economy contracted by 0.3% in the fourth quarter, in line with initial estimates and economists’ forecasts.

The U.S. was to publish official data on durable goods orders and pending home sales later Wednesday, while European Central Bank President Mario Draghi was to speak an event in Germany.