Germany's Top Court Gives ECB 3-month Ultimatum To Explain Govt Bond Purchases

Trading 05 mai 2020 Commentaire »

Germany's top court on Tuesday ruled against the European Central Bank's bond purchases and gave the bank three months to explain how the scheme can be justified. The German Constitutional Court in Karlsruhe said the ECB's EUR 2.1 trillion worth government debt purchases since 2015, were in violation of its mandate and did not take into account the economic and social after-effects.

The court asked ECB to explain why this quantitative easing measure was necessary, and also to check if it was proportional.

The euro area central bank bought these bonds under its Public Sector Purchase Programme, or PSPP, that ran from 2015-2018. The PSPP was restarted in November 2019.

The main issue that the complainants, whom include German economists and law professors, raised was that the ECB was undertaking monetary financing of governments by purchasing public sector debt.

The European Court of Justice had ruled in favor of the ECB in 2018 after the German court requested it to give an opinion on the stimulus measure. The court pointed out that there was not enough German oversight on the purchases and asked the Bundesbank to withdraw from the PSPP if the ECB fails to provide a satisfactory explanation in three months.

Germany's Bundesbank is the major participant in the ECB scheme. The PSPP is touted as a successful ECB stimulus measure that helped support the Eurozone economy amid the 2010 crisis. Meanwhile, the latest German court ruling does not cover the Pandemic Emergency Purchase Programme, or PEPP, worth EUR 750 billion that the ECB announced in March to support the euro area economy amid the social and economic lockdowns triggered by the coronavirus or Covid-19 outbreak globally.

That said, if the ECB fails to give a satisfactory response in three months that could endanger its existing bond purchase programmes in future and severely limit its ability to use non-conventional policy tools in the face of an economic crisis. Economists have chosen to wait for the ECB's reaction to the ruling before reaching a conclusion. "Today's decision could become a real problem for the ECB in the next phase of the crisis when the recovery starts," ING economist Carsten Brzeski said. "Then, a reshuffling between PEPP and PSPP could take place to shift from fire extinguishing mode to a growth supportive model. This shift has now been complicated."


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*Top German Court Gives ECB 3-month Ultimatum To Explain Govt Bond Purchases

Trading 05 mai 2020 Commentaire »

Top German Court Gives ECB 3-month Ultimatum To Explain Govt Bond Purchases


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EUR/USD. Unexpected decision of the German court: Focus on the ECB meeting

Trading 05 mai 2020 Commentaire »

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.

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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.

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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.

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Short-term Ichimoku cloud indicator analysis of EURUSD

Trading 05 mai 2020 Commentaire »

EURUSD has broken below short-term key support around 1.09 and is trading near 1.0850. Daily trend in Ichimoku cloud terms remains bearish since price is still below the Daily Kumo (cloud) resistance.

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The rejection at the lower cloud boundary was an initial bearish signal supporting the scenario that this bounce was only a countertrend move. Price now is breaking below both the tenkan-sen and kijun-sen. This is another bearish signal. As long as price is below the Kumo (cloud) we remain bearish. Price reached our bounce target and after the rejection I continue to fee we are ready to test lower levels. Key resistance is at 1.0980. Support is crucial at 1.0727. Breaking below support will open the way for a move towards 1.06 and lower. What we have been waiting since we broke down below 1.10-1.1030.The material has been provided by InstaForex Company - www.instaforex.com

Short-term Ichimoku cloud indicator analysis of Gold

Trading 05 mai 2020 Commentaire »

Gold price remains inside the trading range we have been talking about the last few days. Price has entered the 4 hour cloud area and is trying to break above key resistance at $1,710-20. Daily trend remains bullish. We continue to feel Gold price is vulnerable to the downside.

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Red lines - trading range

Black line - short-term resistance trend line

Gold price is inside the 4 hour cloud. This implies that trend in the 4 hour chart is neutral. Price has also touched the black downward sloping trend line 3 times so I believe it is an important factor to keep in mind. Whether we see a rejection or a break out, $1,710 is a confluence of resistance both by pure technical analysis and also confirmed by the Ichimoku cloud indicator. Breaking above the cloud would be a bullish sign. This would imply a move to $1,740 and higher is possible. On the other hand a rejection here and a move below $1,690 will increase dramatically the chances of a new lower low towards $1,630.

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U.S. Service Sector Activity Shrinks For First Time In Over Ten Years

Trading 05 mai 2020 Commentaire »

A report released by the Institute for Supply Management on Tuesday showed U.S. service sector activity contracted for the first time since December of 2009 in the month of April.

The ISM said its non-manufacturing index tumbled to 41.8 in April from 52.5 in March, with a reading below 50 indicating a contraction in service sector activity.

The non-manufacturing index slumped to its lowest level since hitting 40.1 in March of 2009 but still came in above economist estimates for a reading of 36.8.

A note from economists at Oxford Economics pointed out the index would have fallen even further were it not for a record rise in the supplier deliveries index caused by supply chain disruptions.

The report said the supplier deliveries index spiked to a record high 78.3 in April from 62.1 in March, with a reading above 50 indicating slower deliveries.

"Non-manufacturing conditions overall are dire as business activity and employment both plunged to record lows while new orders indicate sparse activity in the pipeline," said the economists at Oxford Economics.

The steep drop by the headline index came as the business activity index plummeted to 26.0 in April from 48.0 in March and the new orders index plunged to 32.9 from 52.9.

The employment index also showed a nosedive to 30.0 in April from 47.0 in March, indicating employment in the service sector contracted for the second month in a row.

On the other hand, the report said the prices index rose to 55.1 in April from 50.0 in March, suggesting prices increased after coming in unchanged in the previous month.

The ISM released a separate report last Friday showing U.S. manufacturing activity continued to contract in the month of April.

The report said the purchasing managers index slumped to 41.5 in April from 49.1 in March, with a reading below 50 indicating a contraction in manufacturing activity.


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*ISM U.S. Non-Manufacturing Index Tumbles To 41.8 In April

Trading 05 mai 2020 Commentaire »

ISM U.S. Non-Manufacturing Index Tumbles To 41.8 In April


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Swiss Consumer Confidence At Historic Low

Trading 05 mai 2020 Commentaire »

Swiss consumer confidence reached a historic low in April amid coronavirus pandemic, survey results from the State Secretariat for Economic Affairs, or SECO, showed Tuesday.

The consumer sentiment index fell to -39 in April from -9 points in January. The preliminary reading was -40.

The survey showed that coronavirus is dampening expectations regarding general economic development and unemployment. The indicator for future economic situation plunged to -78.3 from -7.1.

Respondents were getting ready for tough times in terms of their own financial situation. The index for past financial situation improved to -7.2 from -14.2, while expectations deteriorated to -23.6 from -8.0.

The major purchases index came in at -48.0 versus -8.3 in the preceding period.


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Euro Falls Sharply After German Court Rules Against ECB's QE Program

Trading 05 mai 2020 Commentaire »

The euro fell against its major counterparts in the European session on Tuesday, as Germany's top court ruled that the European Central Bank's mass bond-buying to support the euro area partly violates the German constitution.

The court said that the Bundesbank must stop buying government bonds within three months unless the ECB proves that those purchases are needed.

The court observed that the decision exceeded "the monetary policy mandate of the ECB" and gave the central bank three months to take steps to amend the scheme.

"The Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB Governing Council adopts a new decision that demonstrates...the PSPP are not disproportionate to the economic and fiscal policy effects," the court said.

Data from Eurostat showed that Eurozone producer prices declined at a faster pace in March due to a sharp fall in energy prices.

Producer prices decreased 2.8 percent year-on-year in March, faster than the 1.4 percent decrease in February.

The euro depreciated to a 6-day low of 1.0826 against the greenback, 5-day low of 115.61 against the yen and a 4-day low of 0.8701 against the pound, from its early highs of 1.0926, 116.57 and 0.8764, respectively. The next possible support for the euro is seen around 1.06 against the greenback, 112.00 against the yen and 0.84 against the pound.

The single currency hit 1.0518 against the franc, its lowest level since April 24. On the downside, 1.02 is possibly seen as the next support level for the euro.

Reversing from its early highs of 1.5366 against the loonie, 1.8038 against the kiwi and 1.6985 against the aussie , the euro dropped to a 5-day low of 1.5231, 4-day lows of 1.7907 and 1.6815, respectively. The euro is seen finding support around 1.51 against the loonie, 1.67 against the kiwi and 1.61 against the aussie. Looking ahead, U.S and Canadian trade data for March and U.S. ISM non-manufacturing composite index for April will be out in the New York session.


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Eurozone Producer Prices Decline At Faster Pace

Trading 05 mai 2020 Commentaire »

Eurozone producer prices declined at a faster pace in March due to a sharp fall in energy prices, data from Eurostat showed Tuesday.

Producer prices decreased 2.8 percent year-on-year in March, faster than the 1.4 percent decrease in February.

On a monthly basis, producer prices fell 1.5 percent after easing 0.7 percent in February. This was the second consecutive drop in prices.

Data showed an 11.3 percent annual fall in energy prices. Intermediate goods prices were down 1.8 percent. Meanwhile, non-durable consumer goods prices advanced 2.4 percent and capital goods cost moved up 1.1 percent. Durable consumer goods prices increased 1.3 percent.

In EU27, producer prices decreased 1.4 percent on month and declined 2.5 percent on a yearly basis in March.


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