Well, the overnight action was predictable under the circumstances, but it’s nevertheless unnerving for anyone long risk at these levels.

A day after Mario Draghi took what certainly seems to have been a hawkish turn by saying the ECB would “look through” lackluster inflation data, the euro hit a 1-year high:

“Macro accounts jumped on the euro-bull wagon while leveraged ones looked to fade any dip of a 20-25 pip width,” Europe-based traders told Bloomberg, who also notes that risk reversals show bullish euro bets reached multi-month highs versus the dollar and the yen. Amusingly, Constancio tried to walk the whole thing back, insisting that Draghi’s speech was in line with policy. “Market reactions are not always understandable,” he mused.

Meanwhile, Fedspeak about asset bubbles, elevated multiples, suppressed vol., and loose financial conditions has also spooked risk as it only adds to the sense that policymakers are set to try and scale back stimulus.

EM Asian currencies fell early with stocks, tracking the mood in U.S. equities as traders digested Yellen’s “somewhat rich” comment. “The correlation of Asian FX with positive risk appetite has been strong and so this move is not surprising,” says Mingze Wu, a currency trader at INTL FCStone in Singapore.

Despite the hawkish Fed rhetoric, the broad dollar is under pressure from Senate Republicans’ decision to push back a vote on the bill until after the July 4 recess. Additionally, Draghi’s comments suggest the policy divergence between Europe and the US might close (think rate differentials).

“ECB is no longer moving in a completely opposite direction to the Fed and that could be resulting in broader U.S. dollar weakness,” says Janu Chan, a senior economist at St. George Bank in Sydney. “The delay to the vote on the health-care bill highlights the difficulty in passing policies and raises doubts on whether President Trump can pass his stimulus and tax cut policies.”

Oil will be under all kinds of pressure if today’s EIA data confirm the 851k bbl inventory build API reported on Tuesday afternoon.

Crude inventories are still stubbornly high, more than 100m bbl above the 5-year seasonal average, according to EIA data. “Rallies in this market are going to be very fragile and any bad news is going to see prices sold off,” David Lennox, a resource analyst at Fat Prophets in Sydney told Bloomberg. “Investors are well aware of the abundant supply situation and we really need to see some uplift in demand to help clear that.”

Here’s SocGen’s overnight take from Kit Juckes:

Reflationary forces are taking over in Europe while the latest healthcare reform vote in Washington is delayed (or dead). EUR/USD has broken out of the top of its stifling little range. The 10year Treasury/Bund spread is down to 184bp, the lowest level since November 9, and over 50bp tighter than the late December peak. That version of US dollar interest rate support, at least, has moved a long way and while it won’t go on in a straight line (Italian inflation this morning is the next hurdle) the trend in relative rates is unlikely to turn dollar-positive again.

I’m frequently reminded that the Fed is still in rate-hiking mode whereas the ECB (and even more so, the BOJ) is still not close to a rate hike. That’s irrelevant. What matters to asset prices and to the FX market, isn’t the next move but the longer-term destination of rates. The Fed is allowing the market to gradually lower its expectation of where Fed Funds will settle, by downplaying the significance of the 3% long-term median projection from the ‘dot-plot’. Will the peak be 2.75% or 2.5% or even 2.25%? By contrast, with growth picking up and political headwinds removed, the ECB may not be moving but it is at the station. At the moment, the market isn’t pricing a move to 1% rates within the next 5 years, but significantly, it isn’t adjusting expectations about the ECB’s long-term destination lower as fast as the US market has been. When I look, for example, at relative pricing for rates in 5 years however, I can see plenty of room for that gap to narrow from its current 160bp. And the combination of a large Eurozone current account surplus, and an EUR/USD rate that trades between 5% and 15% % below ‘fair value’ depending on which measure you take, any convergence in those relative long-term rate expectations will be euro-positive. If the long-term ‘home’ for Fed/ECB rate differentials is close to 1% than 2%, then home for EUR/USD is closer to 1.30 than 1.10.

A couple of notables from Europe: France’s June Consumer Confidence printed at 108 vs 103, well above estimates. And the DAX index fell as much as 0.9%, hitting its lowest since late May, after breaking below 50-DMA for first time since April 20.

Here’s a snapshot of global equities:

• Nikkei down 0.5% to 20,130.41
• Topix down 0.3% to 1,614.37
• Hang Seng Index down 0.6% to 25,683.50
• Shanghai Composite down 0.6% to 3,173.20
• Sensex down 0.4% to 30,843.25
• Australia S&P/ASX 200 up 0.7% to 5,755.70
• Kospi down 0.4% to 2,382.56
• FTSE 7433.15 -1.21 -0.02%
• DAX 12607.97 -63.05 -0.50%
• CAC 5241.55 -17.03 -0.32%
• IBEX 35 10633.70 -14.20 -0.13%