The German constitutional court today ruled against the euro. Pessimistic forecasts were justified, however, not in the worst execution. On the one hand, the German court said that the quantitative easing program partially violates the Basic Law of Germany. On the other hand, the judges allowed the European Central Bank to argue its decision within three months and prove that it did not exceed its authority. Otherwise, the court will prohibit the Bundesbank from participating in this program. At the same time, the German constitutional court did not agree with the arguments of the European court, which legalized QE two years ago. In other words, the judges questioned the legality of the program, which the European regulator resumed last fall.
Immediately after the court verdict was announced, the EUR/USD pair collapsed. This reaction is quite understandable – today, in any case, increased volatility was expected for the pair, the question was only in which direction the price would go. The first reaction of the market was sharply negative: the European currency fell in price throughout the market, and fell to the bottom of the eighth figure against the dollar. But you should not believe this price movement – at least for now. The subsequent "debriefing" allowed us to look at the situation from a different angle, after which the bulls not only stopped the price decline, but also sent it back towards the ninth figure.
But let's start with a little background to the question. Three years ago, in 2017, German judges already considered a similar complaint about the Bundesbank's participation in the ECB's bond-buying program. The former deputy of the German Parliament, together with other eurosceptics, demanded a private ruling that would oblige the German central bank to immediately stop participating in this program. However, the German constitutional court, in fact, shifted the responsibility for making this decision to the European court. In June 2017, they referred the case to the European court of justice for a preliminary decision. At the same time, the Federal Constitutional Court expressed its opinion, stating that the European regulator is using its bond-buying program to "finance the budgets of European countries in an unauthorized way". However, the European Court on December 11, 2018 ruled that the purchase of government bonds and other securities by the ECB did not contradict EU law.
Now the German constitutional court has yet to evaluate the ECB's quantitative easing program, which lasted from 2015 to 2018, and then was resumed at the end of 2019. That is, we are not talking about "coronavirus money", although, according to some experts, German judges may return to the incentive program amid the spread of Covid-19 in the foreseeable future. But to date, the court has indicated in a separate line: "... the published decision does not concern any financial assistance measures taken by the European Union or the ECB in the context of the current coronavirus crisis." This is an important point, as many market participants expressed concerns that the court's decision could cause problems with the program to combat the consequences of the pandemic.
However, the German court stated that the arguments of the European Court, which did not find violations of EU law, look unconvincing. According to the German court, the program violates the articles of the treaty on the functioning of the European Union. The court's statement states that the ECB is not able to ensure that the "economic and fiscal policy effects did not outweigh its policy objectives", so the regulator's decisions exceed the ECB's monetary policy authority. This refers to the rules according to which the ECB purchases bonds in accordance with the economic weight of each participating country and no more than 33% of the debt obligations of any individual Issuer.
As a result of the judicial review, the judges banned the Bundesbank from participating in the ECB's program for buying government bonds, unless the Board of Governors of the European regulator "provides documentation demonstrating that such balancing took place," during the three-month transition period.
Thus, the European currency was rightly under pressure, given the rhetoric of German judges. But when making trading decisions for the EUR/USD pair, several factors must be taken into account. Firstly, the verdict of the German Federal Constitutional Court does not create legal obligations for the ECB. This court decision, of course, can strengthen the opposition of the German hawks (the Bundesbank had previously expressed its disagreement with QE), but it is unlikely to stop the program as a whole.
Secondly, the European Commission has already made a comment on the decision of the German court. The spokesman for the department said that the laws of the EU take precedence over national laws, that is, the ruling of the European Court is binding on national courts.
Thirdly, the decision of the constitutional court covers only the quantitative easing program that existed before the start of the coronavirus epidemic.
Lastly, the ECB did not say a word. An unscheduled online meeting of members of the ECB will take place today (the meeting is scheduled for 17:00 London time), afterwards, the regulator will announce its position on the court verdict.
Due to these circumstances, it is extremely risky to make any trading decisions at the moment. It is necessary to wait for the results of today's ECB meeting, and based on the market reaction to open long or short positions. The support level is 1.0760 (the lower line of the Bollinger Bands indicator on the daily chart), and the resistance level is 1.0980 (the lower border of the Kumo cloud on the same timeframe, coinciding with the upper line of the Bollinger Bands). If the result of an emergency meeting of ECB members is not in favor of the euro, then the EUR/USD pair could already be consolidated in the seventh figure today, testing the above level of support. If Christine Lagarde can calm the market, the pair will return to the area of the ninth figure.
The material has been provided by InstaForex Company - www.instaforex.com