How fast are Forex scenery changing! A week ago, the balance of power in the EUR / USD pair was very clear: after the decline in demand for safe haven assets amid the gradual opening of economies and the restoration of global GDP, the euro will begin to grow against its main competitor. The US dollar will be pulled to the bottom by the excessively inflated balance of the Fed and the rapid growth of public debt. Alas, after the decision of the German Constitutional Court and the growth of geopolitical risks were added to the previously existing palette of colors, everything turned upside down.
The dynamics of the balance sheets of the ECB and the Fed
Source: Wall Street Journal.
BofA Merill Lynch predicts that EUR / USD will fall to 1.02 by the end of 2020 amid weak global prospects and limited opportunities for the ECB in the field of monetary stimulus. Société Générale notes that the dispute between the two supreme courts of Europe during the pandemic brings to the market the uncertainty that it least needs. Citi warns of increased risks of a split in the eurozone, not from the periphery, but from the core, as the European Central Bank may ignore the demand of the German Constitutional Court, which will challenge the German government.
Indeed, judging by the insider information of the Financial Times, members of the Governing Council are not going to answer judges from Karlsruhe. One official claims that it would be possible to justify the feasibility of QE in 5 minutes, but the ECB should not. When the time comes to raise rates, will he be required to report to any court at his request? The second official noted that the Constitutional Court, apparently, did not study the case materials well enough, because all the justifications for the actions of the ECB are well painted on its website. The third official stated that the defendants are the German government and parliament, while the Governing Council will continue to do what it has done so far.
The verdict of the German court looks ridiculous. What could be a better rationale for QE than helping pandemic-affected countries? Perhaps the European Central Bank erases the line between monetary and fiscal policies, but only because the governments of the eurozone, and especially Germany, do not shell out. The ECB is doing a tough job, and it is being doused with dirt.
A split is smoldering in the currency block, which is exacerbated by forecasts of the European Commission. In her opinion, the eurozone GDP in 2020 will decrease by 7.7%, and in 2021 it will recover only by 6.3%. The size of Italy’s public debt will increase from 135% to 159% of GDP, while Greece will exceed 200% of GDP. In contrast, Germany and the Netherlands will feel quite comfortable.
Government debt to GDP dynamics
Source: Wall Street Journal.
Donald Trump is adding fuel to the EUR / USD peak, giving Beijing a 2-week period during which Washington will monitor China's commitments to increase US exports by $ 200 billion over 2 years, including $ 77 billion in 2020. Given the problems of the Chinese economy due to the pandemic and the reduction in supplies from the States in January-March, new tariffs are just around the corner. At the same time, the fall of the pair below support by 1.077-1.0775 can become critical.
News → The dollar is weakening: is the wish of the US president fulfilled?
News → US dollar continues to decline for the third week in a row
Articles → US Dollar: when will “bulls” become “bears”?
News → The American currency received support from the publication of weak statistics from the eurozone
News → US Dollar Falls After Publication of Consumer Confidence