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The European Central Bank meeting today provided the bulk of excitement as we headed to the end of the London Session.  Mario Draghi announced two things that stood out: 1, that the ECB was extending its eligibility criteria for seven national central banks to make it easier for their financial institutions to attract capital, and 2, that the Committee felt there were signs of stabilization in the economy and it now expects a gradual recovery after growth troughed at the end of 2011.

By extending the eligible criteria the Bank has increased the risk on its balance sheet, which Draghi said required careful risk management. Is this a good thing? It depends if it reduces credit risk and the liquidity flowing into banks eventually filters through to the real economies in the currency bloc, right now that's not happening.

The national central banks who asked for the criteria rules to be extended included: Ireland, Portugal, Spain, Italy and Cyprus along with Austria and France. So the need for liquidity spreads beyond the periphery to the core economies of Europe. And no wonder, with Greece so close to bankruptcy France, whose banks have the most exposure to Greek sovereign and bank debt, must have been getting nervous and with a Presidential election so close Sarkozy wouldn't want developments in Athens further threatening French public finances.

In the past the ECB has loosened collateral rules for loans to certain central banks in the currency bloc, however the national central bank has put the weaker collateral on its balance sheet, rather than on the ECB's. From Draghi's speech it sounded like all the liabilities will be on the ECB's balance sheet, but it is worth watching as Greece for example has seen its national balance sheet balloon since the on-set of the crisis.

Draghi also said that he had just come off the phone with the Prime Minister of Greece who told him that austerity measures had been agreed with all the political parties. The Greek finance minister then added to the feeling of euphoria by saying that Greece had also reached a deal on PSI. So it looks like a default will be avoided after all.

The price action has been fairly mixed; EURUSD has traded in a 100 pip range, but so far has not been able to sustain gains above 1.33. However, central bank liquidity (the BOE also pumped another GBP 50bn into the UK economy today) plus strong US initial jobless claims and growing signs that Greece has avoided default by the skin of its teeth and you should have the ingredients for risk to rally. Thus, if EURUSD can break above 1.33 then could 1.35 be on the cards?

Added to that EURJPY is back above its 100-day sma at 102.90. However, 1.33 is a tough hurdle and after today's madness traders are getting cautious - AUDUSD is stumbling above 1.08, while GBPUSD has traded in a tight range between 1.5810 and 1.5880 as traders digest the QE news. We will have to wait to see if good US jobs news and CB liquidity is enough to spur a rally into the weekend.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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