Central Bank Focus as Yellen and Draghi Grilled

Today is not a good day to be a central bank head with European Central Bank President Mario Draghi set to face tough questions from the media in the post-policy decision press conference and Federal Reserve Chair Janet Yellen facing more potentially hostile questions, this time from the Senate Banking Committee.

The ECB is widely expected to keep interest rates and asset purchases unchanged when it announces its latest policy decision today. But for once, it’s not on this topic that Draghi is likely to face a bombardment of difficult questions. The ECB has become a key player in the Greek saga due to the country’s banks dependency on emergency liquidity assistance (ELA). Greece is a very sensitive topic, especially for the ECB which is meant to be independent of political influence. However, as we saw a few months ago when a protester interrupted Draghi’s press conference, this is not quite seen as being the case.

In particular, the ECBs decision last week not to raise the ceiling on the ELA for Greece, from €89 billion, while increasing the capital that banks needed for the loans, has been criticized as being a politically motivated move to apply pressure to the country’s negotiators. Given that a deal was agreed shortly after and was seen as being particularly dreadful for Greece, it could be argued that the ECBs decision was very influential.

Of course, Draghi himself will probably argue that the move reflected the fact that the solvency of the country’s banks was in question, a condition of their ability to access the ELA, as was the quality of the collateral that they offered as Greece looked on the brink of a default and possible exit from the eurozone. All you have to do is look at the yields on Greek debt last week to see that this was the case. Nonetheless, Draghi is likely to be heavily scrutinized on the issue.

This then brings us to the issue of the ELA now that a deal has been agreed in principal and Greek lawmakers have passed it through parliament along with the four reforms that were demanded by the creditors. With Greece having fulfilled its side of the bargain, the ECB will be expected to increase the ELA which will continue to provide support to Greek banks until the full bailout package has been signed off and Greek banks recapitalized. Draghi may announce that the ceiling will be raised today, or opt to wait until the deal has passed through all 19 member parliaments, with the Bundestag due to debate it on Friday.

Yellen is unlikely to face a much nicer reception when she testifies before the Senate Banking Committee on the semi-annual monetary policy report. These things can often get fiery at times and yesterday’s appearance before the House Financial Services Committee didn’t fail to live up to that. The key takeaway from yesterday’s testimony was that the Fed is still expecting to raise interest rates this year, as long as the economy continues to perform as it expects. The dollar rallied strong off the back of this claim by Yellen as people are yet to be convinced that it will happen, despite her constantly reaffirming the point. The second of these events tends to go largely like the first so we are unlikely to hear anything new from Yellen today. That said, it’s not guaranteed and markets will be particularly sensitive to what Yellen has to say on interest rates and the economy.

Finally there is a few pieces of economic data being released today that will be of interest. Weekly jobless claims are expected to remain quite low at 285,000 following last week’s spike to a four month high of 297,000. The Philly Fed manufacturing index is expected to show activity cooling slightly in July following last months unexpected rise to 15.2. We’re expecting it to fall back to 12 today which would still be higher than any of the first five months of the year.

The S&P is expected to open 11 points higher, the Dow 66 points higher and the Nasdaq 33 points higher.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.