Challenge to ECB’s Stimulus Programme Prompts Euro US Dollar (EUR/USD) Exchange Rate Slump
As the German constitutional court delivered a significant blow to the European Central Bank’s (ECB) independence the Euro to US Dollar (EUR/USD) exchange rate slumped sharply.
Markets were caught off guard by the court’s ruling that the Bundesbank cannot participate in the ECB stimulus programme beyond the next three months, leaving the Euro (EUR) vulnerable to selling pressure.
The court’s call for the ECB to prove that its Public Sector Purchase Programme (PSPP) is not ‘disproportionate to the economic and fiscal policy effects’ raised significant questions over the central bank’s ability to operate.
The move undermines the ECB’s commitment to do ‘whatever it takes’ to support the Eurozone, casting doubt over the possibility of any future stimulus action and driving the Euro lower across the board this morning.
Prospect of Easing Covid-19 Restrictions Limit US Dollar Upside
While investors remain hopeful that the global economy is starting to return to a state of normality support for the US Dollar (USD) proved somewhat limited.
With a number of governments taking steps to ease their lockdown conditions a more risk-positive outlook emerged.
Even so, a significant degree of uncertainty continues to hang over the immediate economic outlook with the world still on track for a sharp recession in the first half of the year.
The US Dollar also benefitted from the weakness of the Euro, thanks to the negative correlation of the EUR/USD exchange rate and the anxiety prompted by the German court’s ruling.
Widened US Trade Deficit May Limit EUR/USD Exchange Rate Downside
Demand for the US Dollar could weaken this afternoon, however, if March’s trade balance shows as sharp a widening of the deficit as forecast.
Fresh evidence of the US economy coming under pressure at the end of the first quarter would leave USD exchange rates exposed to fresh downside pressure.
Confirmation that April’s services PMI weakened sharply on the month may also limit the appeal of the US Dollar in the near term.
As long as the world’s largest economy appears on course for a weak first quarter of activity as a result of Covid-19 disruption this should keep a floor under the EUR/USD exchange rate.
Sharp Drop in German Factory Orders Forecast to Add to Euro Weakness
The mood towards the Euro may continue to sour on Wednesday, meanwhile, as forecasts point towards a marked decline in the latest German factory orders data.
With orders expected to show a -10% drop on the month as the impact of the Covid-19 lockdown bites EUR exchange rates could face a fresh wave of weakness.
As the Eurozone’s powerhouse economy appears on course for a major slowdown in response to weakened global trade and demand investors are likely to lack incentive to support the single currency.
April’s finalised raft of Eurozone services PMIs could also add to the weakness of the EUR/USD exchange rate, particularly if the already weak provisional readings are revised lower.