The Euro took a serious hit last Tuesday: the German Constitutional Court ruled that some ECB actions, in regards to Asset purchases regarding the QE, are unconstitutional and thus not valid in Germany, since the ECB decisions are not backed by the EU treaty.
The court gave the ECB now a 3-month ultimatum to "fix" its QE program.
As a result of the German Constitutional Court ruling, Italian bond yields as their European counterparts spiked high while the Euro dropped.
How does the GCC ruling affect PEPP and what if the Bundesbank is out?
The main reason for the spike respectively the drop seem to be that's noteworthy that this ruling covers the PSPP program, NOT the PEPP program.
The PEPP is a 750 billion euro program that runs at least until the end of this year, and aims to counter the negative impact the Corona lockdown will have on the European economy over the coming months and years.
In fact, PEPP goes even a step further, as the ECB is also buying Greek bonds, not taking the rating of the issuing EU country into account or the "issuer limit".
(Note: the PSPP issuer limit refers to the maximum share of an issuer's outstanding securities that the ECB is prepared to buy and is set at 33%. The issuer limit of 33% is a means to safeguard market functioning and price formation as well as to mitigate the risk of the ECB becoming a dominant creditor of euro area governments.)
While the European currency could stabilise over the last days, especially after the ECB responded, saying that it has taken note of German Constitutional Court ruling and remains fully committed to its inflation mandate, the risk and uncertainties provide bearish potential for the Euro. This could be serious, since it remains unclear as to whether the ECB can really do 'whatever it takes' to save the Euro, or if we are headed to a new Euro debt crisis besides the expected massive economic downturn due to the Corona lockdown.
How to trade the EUR/USD in this environment?
When looking at the EUR/USD, the chart looks all in all very choppy and it seems to identify a clear direction.
Still, on a daily time-frame we can clearly see that the currency pair failed two times over the last weeks to regain 1.1000 and bounced quite aggressively against that level.
That said, as long as we trade below 1.1000, we'd "sell the bounce", especially on lower time-frames as H1 or H4 and expect an attack at the current yearly lows around 1.0630 and even a break lower with a minimum test of 1.0500:
Source: Admiral Markets MT5 with MT5-SE Add-on EUR/USD Daily chart (between March 11, 2019, to May 8, 2020). Accessed: May 8, 2020, at 10:00pm GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.
In 2015, the value of the EUR/USD fell by 10.2%, in 2016, it fell by 3.2%, in 2017, it increased by 13.92%, 2018, it fell by 4.4%, 2019, it fell by 2.2%, meaning that after five years, it was down by 7.3%.
Discover the world's #1 multi-asset platform
Admiral Markets offers professional traders the ability to trade with a custom, upgraded version of MetaTrader 5, allowing you to experience trading at a significantly higher, more rewarding level. Experience benefits such as the addition of the Market Heat Map, so you can compare various currency pairs to see which ones might be lucrative investments, access real-time trading data, and so much more. Click the banner below to start your FREE download of MT5 Supreme Edition!
Disclaimer: The given data provides additional information regarding all analysis, estimates, prognosis, forecasts or other similar assessments or information (hereinafter "Analysis") published on the website of Admiral Markets. Before making any investment decisions please pay close attention to the following:
- This is a marketing communication. The analysis is published for informative purposes only and are in no way to be construed as investment advice or recommendation. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and that it is not subject to any prohibition on dealing ahead of the dissemination of investment research.
- Any investment decision is made by each client alone whereas Admiral Markets shall not be responsible for any loss or damage arising from any such decision, whether or not based on the Analysis.
- Each of the Analysis is prepared by an independent analyst (Jens Klatt, Professional Trader and Analyst, hereinafter "Author") based on the Author's personal estimations.
- To ensure that the interests of the clients would be protected and objectivity of the Analysis would not be damaged Admiral Markets has established relevant internal procedures for prevention and management of conflicts of interest.
- Whilst every reasonable effort is taken to ensure that all sources of the Analysis are reliable and that all information is presented, as much as possible, in an understandable, timely, precise and complete manner, Admiral Markets does not guarantee the accuracy or completeness of any information contained within the Analysis. The presented figures refer that refer to any past performance is not a reliable indicator of future results.
- The contents of the Analysis should not be construed as an express or implied promise, guarantee or implication by Admiral Markets that the client shall profit from the strategies therein or that losses in connection therewith may or shall be limited.
- Any kind of previous or modeled performance of financial instruments indicated within the Publication should not be construed as an express or implied promise, guarantee or implication by Admiral Markets for any future performance. The value of the financial instrument may both increase and decrease and the preservation of the asset value is not guaranteed.
- The projections included in the Analysis may be subject to additional fees, taxes or other charges, depending on the subject of the Publication. The price list applicable to the services provided by Admiral Markets is publicly available from the website of Admiral Markets.