EUR/USD Hit as Germany Rules That ECB Actions are Against EU Treaty

EUR/USD, ECB Analysis and Talking Points

• German Constitutional Court Rules that ECB QE is Legal
• However, Some of ECB’s Actions Violates EU Treaty
• Euro and BTPs Drop as ECB Given 3-Months to Justify Actions

Bottom Line: German Constitutional Court ruled that it did not find the ECB’s PSPP to be in violation of the prohibition on monetary financing, in other words ECB QE is legal (Voting 7:1). The Courts did however, state that some of the ECB’s actions violate the constitution, adding that it isn’t backed by EU Treaty. In turn, the German Court has stated that the Bundesbank may be prohibited from participating in the implementation and execution of the ECB decisions at issue after 3-months, unless the ECB Governing Council adopts a new decision to explain that the monetary policy objectives of PSPP are not disproportionate to the economic and fiscal policy effects.

That said, the ruling does not apply to the actions undertaken by the ECB to combat the impact of coronavirus.

Market Reaction: Initially, the Euro and BTPs saw a slight pop higher as the German Constitutional Court dismissed challenges against ECB QE. However, the caveat that some measures were not backed by EU Treaty ultimately resulted in underperformance in both the Euro and BTPs.

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What Next?: Focus will now turn to the Bundesbank and the ECB to justify PSPP to the German Courts within 3-months in order to prevent the Bundesbank being halted from participating in QE.

EURUSD Price Chart: 1-Minute Time Frame

Source: IG Charts

— Written by Justin McQueen, Market Analyst

Follow Justin on Twitter @JMcQueenFX