As was noted during the US time zone, EUR/USD pierced 1.14. A factor that appears to have flown under the radar is this sign of (continued) aggressive policy support from the ECB, that is:
- ECB corporate bond-buying was up 3.3bn EUR last week, which is around 400m higher than the previous record high over the past 4 years operation of the Bank’s corporate bond purchasing program
ps, ICYMI, the EU Recovery Fund will be the discussion point of note for markets in the ECB meeting Thursday
- financing totalling up to EUR750 bn, split between grants of EUR500 billion and loans of EUR250 billion
- Netherlands, Austria Denmark and Sweden want to reduce the amount of funds distributed as grants
The European Central Bank meet this week, preview below.
- Meeting Thursday 16 July 2020
- Policy announcement at 1145GMT (policy likely unchanged)
Euro forecast via Danske (this from late last week):
- We remain constructive and expect the broad USD to decline over the coming months
- 3 month forecast is 1.15
On the upcoming ECB policy meeting
- we expect a repetition of recent comments from various governing council members, thereby striking a cautiously optimistic tone compared to the June projections.
- We also expect they may decide not to use the EUR1,350bn PEPP envelope in full.
- No new initiatives are expected next week
- Markets may not be prepared for a ‘less dovish’ message
- with abundant liquidity, PEPP and APP still ongoing
- Our key expectation is that the ECB will reiterate its stance towards supporting a recovery, with, not least, a focus on sovereign spreads.
For spot FX,
- the direction and stance of the ECB and euro area fiscal politics are, in our view, quite well priced and communicated (though to a lesser extent when it comes to the outcome for Brexit). In turn, it will be the breath and speed of the global recovery that sets the tone in EUR/USD, and mostly through the USD leg
Last week Germany’s constitutional court issued a decision ruling that the European Central Bank had overstepped its mandate with QE bond purchases,
- German court in Karlsruhe gave the ECB 3 months to justify its euro zone QE stimulus programme, or the Bundesbank might have to step aside from it
Responding, the European Union’s highest court (which had previously permitted the ECB QE programme) and the European Commission said that EU law holds precedence over national regulations
Further now, on Sunday, EU Commission President Ursula von der Leyen said the EU executive might end up opening a legal case against Germany.
- “We are now analysing the ruling of the German Constitutional Court in detail. And we will look into possible next steps, which may include the option of infringement proceedings,”
These wort of legal wranglings are not a positive for EU coherency and stability. Nor are they positive for the EUR. Watching for developments on this front – both legal/political and for ECB actions ahead.
You’ll recall from earlier this week that the court ruled the European Central Bank must ensure its QE bond-buying program is proportionate or else Germany’s Bundesbank central bank may no longer participate.
- And if its not the Germany Bundesbank central bank may no longer participate
The Governing Council of the ECB responded with a “Yeah, right …”:
said it “takes note” of the judgement
- “The Governing Council remains fully committed to doing everything necessary within its mandate”
One member (at least) said the ECB will not respond directly to the court
- court’s arguments are ridiculous
- we could easily answer them
- we should not do so as this is a risk to central bank independence
So, its an ‘as you were’ for the ECB QE program.
The judges reach a 7-1 ruling in the ECB QE case
Despite the ruling, the court says that some action by the ECB QE program partially violates constitution and that some of the action is held illegal i.e. not valid in Germany.
Adding that the ECB decision is not backed by the EU treaty. The decision can be found here
Although there are some caveats, I wouldn’t look too much into this. This just reaffirms that PEPP is going to be untouched, so the lack of suggestive price action means ‘let’s move on’.
I would argue that this is the key passage to take note of in the ruling above:
“Following a transitional period of no more than three months allowing for the necessary coordination with the Eurosystem, 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 in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme. On the same condition, the Bundesbank must ensure that the bonds already purchased and held in its portfolio are sold based on a – possibly long-term – strategy coordinated with the Eurosystem.”
Coming up today, 5 May 2020 ,Germany’s constitutional court (in Karlsruhe) will announce its decision on whether the ECB’s public sector purchase QE program is legal under German law.
It seems likely the decision will accept the program as legal but it could nevertheless impose restrictions on what the ECB does
- ie. it may impose conditions for the ECB’s sovereign bond purchases that could impact the flexibly of policy.
Could be a EUR negative or at least prompt some volatility. A heads up.