By Will Peters

The euro rate is today firm even as Eurozone inflation falls yet further and German unemployment ticks up. Why is the euro so strong then? We offer a reason in today's EUR coverage.

A look at the spot markets shows the euro dollar exchange rate is 0.06 pct higher than seen at last night's close at 1.3642.

The euro pound exchange rate is 0.06 pct higher at 0.8312.

The euro Australian dollar exchange rate is 0.57 pct higher at 1.5287.

PLEASE NOTE: The above quotes are taken from the inter-bank market. Your bank will affix a discretionary spread when passing on a retail rate. However, an independent FX provider will guarantee to undercut your bank's offer, thereby delivering up to 5% more currency. Please learn more here.

Euro defies falling inflation and an increase in German unemployment

The euro has remained firm on the global foreign exchange markets on Tuesday even as the main data points of the day prove to be Euro negative.

Eurozone Consumer Price Index (YoY) came in at 0.8%, analysts had expected 0.9%. This means inflation continues to race further below the European Central Bank's targeted inflationary level that lies just below 2%.

The ECB now has further space to stimulate the EZ economy; in November the ECB cut its benchmark interest rate to a record low of 0.25%, reflecting the low inflation outlook.

The ECB will gather for its latest meeting later this week, although no changes to policy are expected.

The stubborn Euro also batted off news that German unemployment grew by 15K in December, analysts had expected the figure to remain flat.

Then why is the Euro looking so firm?

In the face of today's negative newsflow, why are euro exchange rates so strong?

An answer is offered by UBS analyst Geoffrey Yu who is keeping an eye on investor interest in peripheral Eurozone bond yields:

"Although the euro failed to start 2014 on a strong note, it was a different story for periphery bonds. As of the European close on Friday January 3rd, the spread between the 10-year papers of Spain and Italy over Germany had both narrowed to below 200bp, i.e. their ‘sovereign risk premiums’ are now back down to 2010 levels.

"Given the tightening has been accompanied by general euro resilience, it is a strong indication that external investors are returning to the market in search of carry. Current trends do not help downside EURUSD views, barring perhaps a 'hawkish' Fed shock.

"Nonetheless, even while the structural underpinnings of the 'improvement' may prove sustainable, whether they are acceptable – to the ECB and governments alike – is another matter."

So while external investors continue to buy the Euro to fund investments in government debt in the Eurozone we should expect the currency to remain well bid.