Euro Looks to ECB LTRO Repayment for Direction Cues

January 25, 2013

 The European Central Bank is in focus as it releases details of next week’s first 3-year LTRO repayment. The central bank gave lenders the option to return the money early when it conducted the repo operations. Repayments will be held weekly on the last business day starting January 30. The ECB lent Euro-area banks close to €1 trillion in the two 3-year LTRO operations conducted in December 2011 and February 2012.

Traders will evaluate the size of the LTRO repayment in terms of its implications for borrowing costs and more broadly as a gauge of regional financial stability. A relatively large repayment that implies a significant liquidity drain will bid up yields while telegraphing a sanguine mood among the region’s lenders, boosting the Euro. Needless to say, a disappointingly small one stands to produce the opposite effect.

Turning to the calendar, January’s German IFO business confidence survey is expected to show sentiment improved for a third consecutive month, hitting the highest overall reading since July. In the context of upside surprises on ZEW and PMI data earlier this week however, another relatively firm result is unlikely to produce fireworks. On the other hand, a disappointing print carries downside volatility potential.

Fourth-quarter UK GDP figures are also on tap. Economists expect a contraction, with output down 0.1 percent compared with the three months through September 2012. The recent slide in services and construction PMI figures leaves the door open for a downside surprise, which may weigh on the British Pound as traders rebuild additional QE expectations ahead of February’s BOE policy meeting and updated quarterly Inflation report.

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