It’s unlikely that you can break a birch broom if you do not damage its rods beforehand. The decision of the German Constitutional Court on the legitimacy of the European QE was a real shock to the financial markets. It not only called into question the independence of the ECB, but also increased the risks of the collapse of the eurozone. And Italy became the first damaged rod, the bond yield of which jumped 17 bp, and the spread of rates with German counterparts grew to 250 bp Roberto Gualtieri, the country's finance minister, even had to reassure investors with a statement that the Karlsruhe verdict would not stop purchases of ECB assets.
The German Constitutional Court does not consider the quantitative easing program, launched in 2015, € 2.7 trillion, to be directly funded by governments, but threatens to block new purchases of bonds by the Bundesbank if the ECB does not evaluate the proportionality of the negative effects and benefits of QE within three months. A very unexpected decision. When the European Central Bank begins to normalize monetary policy, will it also be forced to explain to people in gowns all the negative consequences of raising rates for debtors, the unemployed, or governments whose borrowing costs will increase? What kind of independence are we talking about?
No less a shock to the markets was the verdict of lawyers from Karlsruhe on the cancellation of the decision of the European Court on the legality of QE two years ago. For the first time, the national court declared the verdict of the European Court invalid, which undermines the uniform application of EU law - one of the most important achievements of the entire bloc. While the ECB is putting all its strength into avoiding the fragmentation of the eurozone, Germany is giving the blocking process a green light.
The decision of the German Constitutional Court came at a difficult time, especially for the countries of the Old World that were most affected by the pandemic. Italy, which plunged into the recession, has already implemented a € 25 billion aid package and is ready to sign another € 55 billion aid. Resources will be used for financing from the debt market, and if the ECB stops buying local bonds, borrowing costs will increase, which will make the recovery of GDP extremely difficult.
The dynamics of Italian GDP
While the United States, with the joint efforts of the Fed, the White House and Congress, is doing everything possible to bring the American economy to life, German judges limit the ECB's capabilities, jeopardize its independence and increase the risks of fragmentation of the eurozone. If we add to this the lack of compromise among the governments of the countries of the currency bloc regarding the fiscal stimulus, then the fall in EUR / USD seems logical. Moreover, the decrease in business activity in the non-productive sphere from ISM to the lowest levels since 2009 and the reduction in US foreign trade in April strengthen the demand for the dollar as a safe haven currency.
By tying the hands of the ECB, the German Constitutional Court put a new barrier to the restoration of European GDP. The weakness of the eurozone economy is serious and long-term, which allows you to keep the shorts formed on the level of 1.0965 at EUR / USD.
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