After a two-day summit in Brussels, European Union leaders agreed to use the euro zone's bailout funds to support struggling banks directly, without adding to national debt and also agreed to set up a joint banking supervisory body for the euro area.
In addition to the direct recapitalization of Spain's banks, euro zone bailout funds will be able to purchase government debt in order to keep down borrowing costs.
EU leaders also agreed to devote EUR120 billion in stimulus to encourage growth and create jobs.
Announcing the deal, EU Council President Herman Van Rompuy called the accord a "breakthrough" and said it would break the "vicious circle" between banks and national governments.
Following the announcement, the yield on Spanish 10-year bonds fell back to 6.32%, after rising to the critical 7% level on Thursday, while the yield on Italian 10-year bonds eased back below 6%.
The euro posted its largest one day gain against the greenback since October, with EUR/USD settling at 1.2660 by close of trade, up 1.75%. Against the yen, the euro rallied 2.20% to 101.03 at close of trade.
The pound also rallied against the U.S. dollar, advancing 1.19% to settle at 1.5701, but the outlook for sterling remained clouded amid speculation that the Bank of England will announce more quantitative easing measures at next week's policy meeting, in order to shore up growth in the recession hit economy.
The risk-on rally bolstered demand for higher-yielding, growth linked currencies. The Australian dollar jumped 1.19% against the greenback to settle at 1.0235, the highest level since May 4, while the New Zealand dollar surged 1.65% to close at 0.8008.
In the week ahead, investors will be closely watching the outcome of the European Central Bank's policy meeting on Thursday, amid growing expectations for a rate cut to support the faltering economy.
In the U.S, markets will be closed on Wednesday for the Independence Day holiday, while the country is to release official data on nonfarm payrolls report on Friday, after disappointing results in June sparked concerns over the strength of the U.S. economic recovery.
Ahead of the coming week, Forexpros has compiled a list of these and other significant events likely to affect the markets.
Monday, July 2
Japan is to publish data on the Tankan manufacturing and non-manufacturing indexes, leading indicators of economic health.
The euro zone is to release official data on the unemployment rate, while Italy is to publish a report on manufacturing activity.
Switzerland is to produce official data on retail sales, the primary gauge of consumer spending, which accounts for the majority of overall economic activity, followed by the SVME purchasing managers' index.
Elsewhere in Europe, the U.K. is to release data on manufacturing activity.
In the U.S., the Institute for Supply Management is to release a report on activity in the manufacturing sector. Also Monday, markets in Canada are to remain closed for a national holiday.
Tuesday, July 3
The Reserve Bank of Australia is to announce its benchmark interest rate. The announcement is to be accompanied by the bank's rate statement, which outlines the reasons for the bank's policy decision and discusses the economic outlook. Australia is to produce official data on building approvals, an excellent gauge of future construction.
Japan is to publish government data on average cash earnings.
The U.K. is to release industry data on house price inflation, followed by a report on construction sector activity. In addition, the BoE is to publish data on net lending to individuals.
Later in the day, the U.S. is to publish official data on factory orders, a leading indicator of production.
Wednesday, July 4
Australia is to produce industry data on service sector activity, followed by official data on retail sales.
The euro zone is also to publish official data on retail sales, as well as revised data on service sector activity. Elsewhere, the U.K. is to produce a report on service sector growth.
Markets in the U.S. are to remain closed for the Independence Day holiday.
Thursday, July 5
Australia is to publish official data on trade balance, which is the difference in value between imported and exported goods and services.
In the euro zone, Germany is to produce official data on factory orders, a leading indicator of production. Meanwhile, Spain and France are to hold auctions of 10-year government bonds.
Later in the day, the ECB is to announce its benchmark interest rate. The announcement is to be followed by a press conference with central bank head Mario Draghi to outline the reasons for the monetary policy decision and discuss the economic outlook for the euro area.
In the U.K., the BoE is to announce its benchmark interest rate and any changes to the size of the central bank's asset purchase program.
The U.S. is to publish a report by payroll processing firm ADP on non-farm employment change, followed by government data on unemployment claims. The country is also to release an ISM report on service sector growth, as well as government data on crude oil stockpiles.
Friday, July 6
Switzerland is to release government data on consumer price inflation, which accounts for the majority of overall inflation. Meanwhile the Swiss National Bank is to release data on its foreign currency reserves.
The U.K. is to publish official data on producer price inflation, a leading indicator of consumer inflation.
In the euro zone, Germany is to produce official data on industrial production, a key indicator of economic health.
Later Friday, Canada is to publish official data on building permits, an excellent gauge of future construction activity, as well as official data on employment change and the unemployment rate. The country is also to release a PMI report by the Richard Ivey School of Business.
The U.S. is to round up the week with official data on non-farm employment change and the unemployment rate, as well as data on average hourly earnings, an important indicator of consumer inflation.