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Euro May Rise as LTRO2 Prepayment Offsets German GDP Slump

By , Currency Strategist
22 February 2013 06:11 GMT

The Euro may recover into the end of the trading week as a large LTRO2 prepayment offers yield support, offsetting negative cues from a slump in German GDP.

Talking Points

  • Euro May Rise as Large LTRO2 Prepayment Offsets German GDP Slump
  • Australian Dollar Gains as RBA’s Stevens Talks Down Rate Cut Outlook

The final revision of fourth-quarter German GDP figures headlines the economic calendar in European hours. Eurozone growth concerns are rife after yesterday’s disappointing PMI data roundup, meaning a downgrade of the originally estimated 0.6 percent contraction may weigh on the Euro as traders bet deepening recession will push the ECB take offsetting measures. Slowing growth has already begun to be priced into the exchange however, leaving room for a newer offsetting catalyst with scope to take the lead.

With that in mind, the central bank will announce the size of this week’s 3-year LTRO pre-payment. Notably, this week banks will be able to repay financing via the second LTRO (conducted in February 2012) as well as the first (December 2011). That may bring institutions that have not had an opportunity to participate thus far into the equation, making for a larger figure than in recent weeks.

The first opportunity to pre-pay LTRO1 funding saw 137.2 billion returned by 278 banks. Since then, the numbers have dropped dramatically, with only 12.3 billion repaid by 57 banks over the following three weeks. If the first round of LTRO2 repayment marks a similarly large up-front reduction in the ECB’s balance sheet, the de-facto tightening of monetary that it implies is likely to be supportive for the Euro.

The Australian Dollar outperformed in overnight trade, adding as much as 0.8 percent on average against its leading counterparts. The push higher followed comments from RBA Governor Glenn Stevens in testimony to the House Economic Committee that were perceived as limiting scope for interest rate cuts. Stevens said there was a “good deal of stimulus [already] in the pipeline,” implying the impact of previous easing efforts has yet to fully filter into the real economy.

The central bank chief added that growth is seen close to trend while inflation is on-target for the coming 1-2 years, reinforcing a neutral policy lean for the time being. When asked by lawmakers about the current setting of interest rates specifically, Stevens said the level was “appropriate”. Traders are now pricing a 24 percent probability of another 0.25 percent rate cut at the March RBA meeting, according to data from Credit Suisse.

Asia Session:

GMT

CCY

EVENT

ACT

EXP

PREV

22:30

AUD

RBA’s Stevens Testifies to House Economics Committee

-

-

-

2:00

NZD

Credit Card Spending s.a. (MoM)

-2.5%

-

1.0%

2:00

NZD

Credit Card Spending (YoY)

0.4%

-

4.5% (R-)

Euro Session:

GMT

CCY

EVENT

EXP

PREV

IMPACT

7:00

EUR

German GDP s.a. (QoQ) (4Q F)

-0.6%

-0.6%

High

7:00

EUR

German GDP n.s.a. (YoY) (4Q F)

0.1%

0.1%

High

7:00

EUR

German GDP w.d.a. (YoY) (4Q F)

0.4%

0.4%

High

7:00

EUR

German Domestic Demand (4Q)

-0.1%

0.0%

Low

7:00

EUR

German Capital Investment (4Q)

-1.3%

0.2%

Low

7:00

EUR

German Private Consumption (4Q)

0.1%

0.3%

Low

7:00

EUR

German Government Spending (4Q)

0.2%

0.4%

Low

7:00

EUR

German Exports (4Q)

-2.0%

1.4%

Low

7:00

EUR

German Imports (4Q)

-1.0%

1.0%

Low

7:00

EUR

German Construction Investment

-0.8%

1.5%

Low

9:00

EUR

German IFO - Business Climate (FEB)

104.9

104.2

Medium

9:00

EUR

German IFO - Expectations (FEB)

101.4

100.5

Medium

9:00

EUR

German IFO - Current Assessment (FEB)

108.5

108.0

Medium

10:00

EUR

EU Issues Economic Forecasts in Brussels

-

-

Medium

11:00

EUR

ECB Announces 3yr LTRO Repayment

-

-

High

Critical Levels:

CCY

SUPPORT

RESISTANCE

EURUSD

1.3137

1.3267

GBPUSD

1.5166

1.5362

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

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

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22 February 2013 06:11 GMT