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EUR Gaining Ground as German Court Backs Off in ECB Spat



EUR has been making decent ground on the first trading day of the week. Having been as low as the 1.1200 mark only last Friday, EURUSD has now nearly made its way back to the 1.1300 level. A number of EUR positives appear to be at play here;

1) German Court Judge Huber said that it is up to the Bundesbank to decide on the proportionality of ECB bond purchases and that the court was no longer involved with the decision on whether to quit purchases.

As a reminder; back in May the German Constitutional Court ruled that the ECB overstretched its mandate on government bond purchases and ordered the Bundesbank to pull out of the PSPP bond purchase programme while the ECB proved its case.

At the time, EUR sold off on this decision; the interference of the German court was seen as a threat to ECB independence and a threat to the longevity of the ECB’s QE programme (which is seen as vitally important in the longevity of the Eurozone – markets pretty much think that without QE, there would another debt crisis and thus the end of the EUR).

But over the last week or so, the German Court has been making more conciliatory gestures, and it appears to have said it will drop the issue now; by saying the decision is up to the Bundesbank, they are pretty much admitting defeat, as the Bundesbank would never voluntarily contradict ECB policy by pulling out of the PSPP programme. (Remember, under European law, the Bundesbank is part of the ECB and must abide by ECB policy decisions).

2) US Virus concerns continue to escalate, while signs of a second wave in the EU are much more limited.

The difference between how well the EU vs US has managed to contain the spread of Covid-19 is becoming increasingly stark.

Over the last 4 days, new cases in the US have topped 40k, with the situation in the South becoming increasingly desperate (a number of States including Florida, California and Texas have been implementing lockdown restrictions, while activity data shows that, in these regions, consumers are becoming more cautious).  

Meanwhile, over in Europe, new cases have been consistently below 10k since the early May. Such divergence has resulted in a shift in economic expectations; in the minds of investors, US growth expectations are being revised lower, whilst European growth expectations have remained steady.


Why? In Lehman’s terms; the fact that the US is coping with a worse outbreak means that its economy won’t be able to recover as well (due to fresh lockdown measures, combined with terrified consumers). Meanwhile, as long as the EU can keep any localised outbreak under wraps, the Eurozone economy should be able to be reopened (and industries like tourism might be able to restart). This means Europe is set to economically outperform the US – a recipe for a higher EURUSD. 

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