Yellen and Carney continue the hawkish cues

Draghi steps up

Euro continued its broad sell-off yesterday despite a broadly supportive European Central Bank meeting and press conference from Mario Draghi. The President of the European Central Bank was in quite a bullish mood as typified by his statement that all monetary policy instruments will be used by the European Central Bank moving forward and that the ECB’s asset buying program – the buying up of sovereign and corporate debt – will be fairly implemented.

Questions on Greece are when Draghi came into his own however and announced the extension of the ELA – liquidity for Greek banks. This was not a unanimous decision and he hinted that some members of the Governing Council were not happy giving more money to Greece. They were the one wearing lederhosen most likely.

The EUR900m works out at 32 euros per household per day and will last a week, taking the total liquidity assistance to EUR89.9bn. He still expects the Greeks to pay the EUR3.5bn bond due this Monday – something that will only happen if the bridging finance plan currently being negotiated is agreed in time. It is up to the Greek authorities whether they feel comfortable opening the banks up for business on Monday but we would definitely expect withdrawal limits to remain on ATMs and transferring money out of the country to remain prohibited.

Possibly Draghi’s most important comment was that debt relief for Greece was ‘necessary’. So it now stands that the ECB, IMF, France and Italy are stacking up against Germany on this issue and calls for reductions in interest rates, suspension of interest payments and/or extensions of bond maturities will rattle on into next week.

Euro still looks weak into the weekend in my eyes although this weekend carries a lot less risk than the previous three and therefore the desire for haven trades should also be diminished somewhat.

Bulls on parade

Both Yellen and Carney maintained their increasingly hawkish bents in the past 24hrs. Yellen gave a very similar testimony to Wednesday’s to the Senate yesterday while Carney, speaking at Lincoln Cathedral, overtly suggested that the turn of the year was when rates were likely to be brought higher. GBP and USD remain the currencies that everyone wants at the moment with commodity complex currencies unable to get up off the mat.

With the Greek vote on negotiations for a 3rd bailout passing in the early hours of yesterday morning the spotlight now falls on the Bundestag in Germany. Once again we are not expecting the German parliament to torpedo the deal and the most interesting metric will be how many members of Merkel’s CDU party dissent. She is not in danger of a leadership challenge however.

US inflation the major harbinger

Elsewhere, we have the latest run of inflation numbers from the US economy to contend with. For all the hawkish rhetoric from Yellen in recent days it will not be much good if prices are not rising in line with a recovery back to a mandated CPI. Core CPI rising above 1.8% would be seen as a strong sign with the belief that the headline index will recover once oil price declines are no longer factored into the year-on-year calculations.