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EURUSD forecast for 06.05.2020

May 6, 2020

May 6, 2020

Euro holds the ECB backDmitri Demidenko

The decision of the German top court sends the EUR/USD down

You can’t break a broom if do not damage its rods first. The long- awaited decision of Germany’s constitutional court on the legacy of the European QE has become a shock for financial markets. It has undermined the ECB independence and increased the EU break-up. The first broken rod has become Italy. Italy’s bond yield jumped as much as 17 basis points, widening the gap with their German counterparts to 250 basis points. Italian Finance Minister Roberto Gualtieri had to calm down the markets saying that the German court’s decision won’t stop ECB asset purchases.

The German constitutional court says that the ECB €2.7-trillion QE program, which started in 2015, is not direct financial assistance to the governments. However, it warns that the Bundesbank will stop buying government bonds if the ECB doesn’t fix the flaws in the QE program within three months. It seems that, when the ECB starts normalizing its monetary policy, it will also have to explain to the judges all negative effects of the interest rate hikes for the borrowers, the unemployed, and the governments, whose borrowing costs are to increase. Is it independence?

Another shock for the markets has been the news that the German top court has ruled that the decision of the European court on the QE legacy taken two years ago is beyond its legal powers. The German constitutional court, for the first time, has declared the ruling of the European court to be illegal. This undermines the EU uniform legal order, one of the most important achievements of the entire currency bloc. While the ECB is taking every measure to avert the euro-area fragmentation, Germany seems to be indulging the euro-area break-up.

The decision of the German Constitutional Court came at a difficult time, especially for the countries most affected by the pandemic. Being deep into the recession, Italy has already passed an initial set of stimulus measures for its economy worth €25 billion and is willing to acquire another package worth at least €55 billion. To fund the stimulus package, there will be used the resources raised in the debt market, and, if the ECB doesn’t buy the local bonds, borrowing costs will be increasing, which will set back the process of the GDP recovery.

Dynamics of Italy’s GDP

![LiteForex: EURUSD forecast for 06.05.2020][1]

Source: Bloomberg

While the Fed, the US administration and the Congress are taking every measure to support the U.S. economy, Germany’s judges limit the ECB power, threaten its independence and increase the risks of the euro-area fragmentation. In addition, the leaders of the euro-area governments fail to find a compromise on the fiscal stimulus. So, the [EUR/USD][2] drop looks natural. Especially since the drop in the ISM services PMI to the lowest level since 2009 and the contraction of the US foreign trade in April increase the demand for the US dollar as a safe-haven asset.

Limiting the ECB power, the German constitutional court sets a new barrier to the recovery of the euro-area GDP. The European economy will be weak for a long time. So, it is relevant to hold down the [EUR/USD][2] shorts [entered at level 1.0965][3].

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Price chart of EURUSD in real time mode

![Euro holds the ECB back][6]

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. cdn.liteforex.com/cache/uploads/blog_post/eurusd/italy-economy-06-05-20.jpg?w=30&s=4f90760ce248e4053a10723b12446a84
  2. my.liteforex.com/trading/chart?symbol=EURUSD&returnUrl=true
  3. www.liteforex.com/blog/analysts-opinions/euro-has-started-the-game-badly/
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  6. cdn.liteforex.com/cache/uploads/blog_post/eurusd/liteforex-blog-eurusd-06-05-20.jpg?q=75&w=1000&s=fdd9337269917ec28cef742909fc8af0