ForexLive US wrap: Euro squeeze takes on new dimension

US GDP rises 2.8% in Q4; final sales up only 0.8%; inflation tumbles; Core PCE up 1.1%, down from 2.0%
ECB’s Draghi: Europe has avoided credit crisis thanks to LTRO
University of Michigan consumer sentiment rises to 75 final in January from 74.0 prelim
NY Fed’s Dudley: Unemployment unacceptably high, inflation seen decelerating
BOE’s Miles: QE not a done deal for February; will hinge on forecasts; sees inflation falling, spare capacity to stay high
ECB’s Nowotny sees similar demand for second 3-year LTRO as the first (EUR 480 bln)
Greek FinMin: Only one step left to complete debt swap but second bailout negotiations tough
Some G20 countries warming to idea of more funding for euro zone
Italy, Spain, Belgium, Slovenia and Cyprus all downgraded by Fitch
S&P cuts outlook on German insurer Allianz; rating stable at AA
Greek PM: Optimistic debt swap to be completed within days; talks continue Saturday
Germany wants Greece to relinquish budget control as part of second bailout
S&P 500 falls 0.2% to 1316; Milan down 1%
US 10-yr note yield falls 5 bp to 1.89; Italy falls 16 bp to 5.92%
WTI rises $0.09 to $99.79; gold rises $19 to $1740

The short-covering rally in EUR/USD accelerated today after NY Fed chief Dudley pour a few more gallons of gasoline on the QE3 fire started by Bernanke on Wednesday. Much of the move was technical in nature but a sharp drop in European bond yields aided the euro’s cause (except for Portuguese yileds, which trades as though they are headed for Grecian levels..)

EUR/USD weakened early in New York as a thinly-sourced story about Greece preparing to leave the euro zone made the rounds but we got directional on the European close and jumped from 1.3110 through 1.3200 resistance by early afternoon. The catalyst for the sustained break of 1.3200 was the failure of EUR/USD to fall materially after Fitch unexpectedly downgraded 35% of the euro zone. EUR dipped to 1.3165 momentarily but soon spiked as shorts realized there wasn’t gonna be a dip to buy today and raced to get back shorts before the weekend. 1.3235 was the traded high, quiet close to important resistance at 1.3245, the 38.2% retracement of the 1.4250/1.2625 decline.

Cable was insanely volatile today, bashed down from above 1.57 to 1.5645 at the London fixing only to soar to 1.5740 late in the day.

USD/JPY fell throughout the session along with US yields, only relenting when we got within spitting distance of rumored by offers left by Japanese institutional investors at 76.50.

AUD and CAD were a bit subdued today owing to heavy short-covering of EUR/AUD and EUR/CAD positions.

EUR/CHF ends the week uncomfortably close to the SNB’s 1.2000 line in the sand, at 1.2055. The euro rally has not done tht cross one bit of good.

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