(CEP News) - Risk appetite has returned to markets on Wednesday as the Federal Reserve prepares to render a decision on interest rates.

The Dow Jones industrial average is up 95 points to 8112, the S&P 500 is up 11 points to 866 and the Nasdaq is up 21 points to 1695. In Canada, the S&P/TSX composite index is up 49 points to 9397.

Markets generally disregarded first-quarter U.S. GDP figures, which were much worse than consensus forecasts on the back of plummeting private investment, and as trade levels continued to shrink. Advance GDP for the first quarter of 2009 contracted 6.1% against expectations of a 4.7% decline.

"The overall take is that Q1 was a capitulative quarter for business even as consumer [spending] was a bit stronger," said David Ader, U.S. government bond strategist at RBS Greenwich Capital. "As weak as the headline was, this is 'old' news of sort and the inventory contribution to the weakness won't look as bad going forward."

European stock markets closed with the Stoxx 50 up 31 points to 1998, the UK FTSE 100 up 93 points to 4190 and the German DAX up 97 points to 4705.

Colin Cieszynski, market analyst at CMC Markets, said markets responded more strongly to personal consumption data than GDP. The U.S. government said consumption increased 2.2% in the first quarter, much better than the 0.9% rise expected.

Concerns over the swine flu continue to make headlines. The media are reporting that a 23-month old child from Texas is the first person to die of the swine flu in the U.S. The World Health Organization said it may raise the threat level to 5, one notch below 'pandemic'. According to the Center for Disease Control, there are now 91 cases of the swine flu in the U.S.

The major event of the day is the FOMC rate decision at 2:15 p.m. EDT. With interest rates essentially at zero, most strategists agree that the Fed won't be making any major announcements.

At the most recent meeting on March 18, the Fed announced it was expanding its balance sheet by $1.2 trillion. The announcement included the purchase of $300 billion in longer-term Treasury securities. Following the announcement, the U.S. dollar index dropped 3.6%.

Some strategists suggest that the Fed could expand those purchases but most believe they are complete.

"I think we have seen some relative stability since the Fed's last meeting," said Jamie Coleman, currency strategist at Forexlive.com. "I think that means there is very low risk that the Fed makes any major changes."

Canadian Dollar and Other Commodity Currencies Move Higher Against U.S. Dollar

Commodity currencies are the top performers against the U.S. dollar as risk appetite moves back into financial markets, boosting equity markets Wednesday.

The top performers of the day are the New Zealand dollar, the Australian dollar, the Norwegian krone and the Canadian dollar.

Looking at USD/CAD, the cross has been on a strong downtrend throughout most of the session and remains near the bottom of Wednesday's trading range, hovering just above 1.20 CAD. Currency strategists are expecting stronger equity markets and positive market sentiment to continue to support the loonie in the short term.

John Hardy, FX strategist at Saxo Bank, said traders could be feeling that concerns over a potential pandemic are a non-issue for the moment. However, he added that more bad news could cause a sharp reversal in market sentiment.

"We certainly hope that the market is correct on this matter, but are also fearful of the potential effects on everyone if this sanguine assessment proves premature," he said. "Let us all earnestly hope that the market's optimism is justified on this matter, while understanding the potential for disaster."

Looking at commodity currencies, such as the Canadian dollar, Hardy said their fate will continue to be determined by moves in the equity market.

George Davis, chief technical analyst at RBC Capital Markets, said he is still bullish on the Canadian dollar and is expecting the 1.21 level to act as strong support in the short term. He said the bullish trend in the Canadian dollar could lead USD/CAD to test support at 1.853 CAD.

The Canadian dollar is up 0.0118 to 0.8325 against the U.S. dollar (1.2018 USD/CAD) and up 1.59 to 80.71 against the yen.

The U.S. dollar is up 0.53 to 96.98 against the yen and the Dollar Index is down 0.886 to 84.272.

The euro is up 0.0172 to 1.3321 against the U.S. dollar, down 0.0026 to 1.6008 against the Canadian dollar, up 0.0023 to 0.9009 against the pound sterling and is higher by 2.38 to 129.18 against the yen.

The pound sterling is up 0.0151 to 1.4786 against the U.S. dollar and down 0.0069 to 1.7771 against the Canadian dollar.

WTI crude oil is up $0.62 to $50.54. The front month gold contract at the Chicago Board of Trade is up $7.60 to $900.80 per ounce.

Treasuries Rally After Refunding

The Treasury market is relatively quiet ahead of the FOMC rate decision on Wednesday.

U.S. two-year yields are down 1.6 bps to 0.93%, with five-year yields up 1.4 bps to 1.95%, 10-year yields flat at 3.00% and 30-year yields down 3.2 bps to 3.92%.

Most market watchers don't expect the Federal Reserve to announce further quantitative easing measures when the decision is released at 2:15 p.m. EDT.

In the quarterly refunding, the Treasury Department said it will increase 30-year auctions to 12 per year. Upcoming borrowing levels were slightly lower than expected. They will sell $35 billion in three-year notes, $22 billion in 10-year notes and $14 billion of 30-year notes.

Despite rumours to the contrary, the Treasury Borrowing Advisory Committee did not recommend a 50-year note but several members suggested that twice-monthly two-year auctions or a four-year note.

Some Committee officials said they were very concerned about the exit strategy from quantitative easing when markets recover. There's also fear there may be little reprieve from cyclical financing needs once the economy improves because of changing demographics.

Elsewhere in fixed income, yields on two-year Canadian government notes are flat at 0.99%, with five-year yields up 2.1 bps to 2.00%, 10-year yields up 1.8 bps to 3.07% and 30-year yields up 1.3 bps to 3.81%. The September 09 BAX contract is up 1.0 tick to 99.58.

In Germany, returns on two-year German notes are down 0.8 bps to 1.32%, with five-year yields down 1.9 bps to 2.32%, 10-year yields down 1.6 bps to 3.13% and 30-year yields down 4.7 bps to 3.87%.

Yields on UK two-year notes are down 3.4 bps to 1.07%, with five-year yields down 2.1 bps to 2.36%, 10-year yields flat at 3.45% and 30-year yields up 2.8 bps to 4.31%.

All data taken at 12:28 p.m. EDT.

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