Forex Analysis: Euro Finds Yield Support, US GDP and FOMC on Tap

The Euro soared as banks began repaying LTRO funding, draining liquidity and boosting yields. US GDP data and the FOMC rate decision may hurt risk appetite.

Talking Points

• US 4Q GDP, FOMC Policy Announcement May Spark Risk Aversion
• New Zealand Dollar Underperforms Before RBNZ Interest Rate Decision
• Euro Soars as LTRO Repayment Offers Yield Support, Yen Declines

Yet another relatively quiet day on the European economic data front shifts attention to a busy US docket. Fourth-quarter GDP figures are expected to show that output added 1.2 percent compared with a 3.1 percent increase in the three months through September 2012. This is swiftly followed by the FOMC rate decision.

Ben Bernanke and company seem overwhelmingly unlikely to introduce anything new into the policy mix after December's major reshuffling. The rhetoric of the policy statement may take a stronger dovish tone however if the central bank sees a need to talk down the idea that the "Evans rule" will bring an earlier end to stimulus measures. Speculation about such an outcome began following the release of minutes from December's sit-down.

On balance, this makes for a potentially vulnerable environment asslowing growth and a dour statement from the Fed may begin to pour cold water on buoyant sentiment trends. This is all the more ominous considering it sets the stage for the upcoming fight over "sequester" spending cuts in Washington DC and shapes perceptions of resilience in the face of further austerity.

Tellingly, the risk-linked Australian, Canadian and New Zealand Dollars are underperforming heading into the event risk. The Kiwi is getting hit particularly hard as traders await the policy announcement from the RBNZ later in the day. No major changes are expected but worries about the emergence of a more bellicose posture on the exchange rate seem to be in the air.

The Euro likewise put in a strong showing as banks began early repayment of ¬137.2 billion of the 3-year LTRO cash they received from the ECB in late 2011 and early 2012. The move amounts to a draining of market liquidity and markets responded by pushing front-end yields higher, seemingly offering beta-driven support to the single currency. The Japanese Yen dropped as Asian stocks advanced, sapping demand for the regional safe-haven.

Asia Session:

GMT	CCY	EVENT	ACT	EXP	PREV
21:45	NZD	Building Permits (MoM) (DEC)	9.4%	6.0%	-5.2% (R+)
23:50	JPY	Retail Trade (YoY) (DEC)	0.4%	0.3%	1.2% (R-)
23:50	JPY	Retail Trade s.a. (MoM) (DEC)	0.1%	0.4%	-0.1% (R-)
23:50	JPY	Large Retailers\' Sales (DEC)	0.0%	-1.0%	0.9%
0:00	AUD	DEWR Internet Skilled Vacancies (MoM) (DEC)	-2.8%		-3.4% (R+)

Euro Session:

GMT	CCY	EVENT	EXP/ACT	PREV	IMPACT
7:00	CHF	UBS Consumption Indicator (DEC)	1.34 (A)	1.23	Low
8:00	EUR	Spain GDP - Constant SA (YoY) (4Q)	-1.8% (A)	-1.6%	Medium
8:00	EUR	Spain GDP (Constant SA) (QoQ) (4Q)	-0.7% (A)	-0.3%	Medium
8:00	CHF	KOF Swiss Leading Indicator (JAN)	1.05 (A)	1.29	Medium
9:30	GBP	Net Consumer Credit (DEC)	0.6B (A)	0.1B	Low
9:30	GBP	Net Lending Sec. on Dwellings (DEC)	1.0B (A)	0.0B (R+)	Low
9:30	GBP	Mortgage Approvals (DEC)	55.8K (A)	54.0K	Medium
9:30	GBP	M4 Money Supply (YoY) (DEC)	-1.0% (A)	-2.9% (R-)	Low
9:30	GBP	M4 Money Supply (MoM) (DEC)	0.7% (A)	-0.2%	Low
9:30	GBP	M4 Ex IOFCs 3M Annualised (DEC)	3.8% (A)	4.8% (R+)	Low
10:00	EUR	Euro-Zone Economic Confidence (JAN)	89.2 (A)	87.8 (R+)	Low
10:00	EUR	Euro-Zone Business Climate Indicator (JAN)	-1.09 (A)	-1.11 (R+)	Low
10:00	EUR	Euro-Zone Industrial Confidence (JAN)	-13.9 (A)	-14.2 (R+)	Low
10:00	EUR	Euro-Zone Consumer Confidence (JAN F)	-23.9 (A)	-23.9	Medium
10:00	EUR	Euro-Zone Services Confidence (JAN)	-8.8 (A)	-9.8	Low

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3438	1.3634
GBPUSD	1.5708	1.5828

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow Ilya on Twitter at @IlyaSpivak

To be added to Ilya's e-mail distribution list, please CLICK HERE