- The EUR/USD pair declined as investors exited the euro following a landmark court ruling in Germany.
- The European Commission forecasts that the EU economy will shrink by 7.5% this year.
- Retail sales and services PMI plunged to historic lows according to Eurostat and Markit.
The EUR/USD pair declined today after a series of weak economic data and a German court ruling dampened sentiment on the euro.
ECB hits back at a German court
The EUR/USD pair declined after the European Central Bank (ECB) sent a sharply-worded response to a German court. This was in response to a ruling the court made yesterday about the legality of quantitative easing (QE).
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Ruling on a suit brought by a team of German economists, the court sitting at Karlsruhe asked the ECB to offer more explanations on QE. The suit argued that the unconventional monetary policy was against the law.
The court asked the German government and parliament to carry out a “proportionality assessment” of the program. In this assessment, the court asked the policymakers to consider whether the economic and fiscal effects did not outweigh the policy objectives.
In a statement, the ECB said that QE was legal due to a court by the Court of Justice of the European Union (ECJ) in 2018. The ECB responded, saying that the purchases were legal due to a ruling by the Court of Justice of the EU in 2018.The statement said:
“The ECB remains fully committed to doing everything necessary within its mandate to ensure that inflation rises to levels consistent with its medium-term aim and that the monetary policy action taken in pursuit of the objective of maintaining price stability.”
More perspectives on QE
Quantitative easing is an unconventional monetary policy tool used by several major central banks. The process involves printing of money and buying financial assets like bonds and exchange traded funds (ETFs). According to the ECB, the goal of QE is to bring more liquidity in the market, boost inflation, and lower asset prices.
Several central banks are currently implementing QE. In March, the Federal Reserve said that it would embark on an open-ended QE in response to the coronavirus pandemic. As a result, the bank has expanded its balance sheet to a record high of more than $6.4 trillion. According to analysts, the balance sheet could reach $10 trillion.
In March this year, the ECB said started a €750 billion QE to help cushion the eurozone economy. Just last week, Christine Lagarde said that the bank would purchase as much assets as needed. In other words, she opened the door to an open-ended QE.
EUR/USD reacts to weak data from Europe
The EUR/USD pair is also reacting to weak data from Europe. The eurozone commission will drop by 7.5% this year, according to data from the European Commission. This is a dramatic pullback from last year’s gain of about 0.2%. According to Eurostat, the economy in the EU shrank by 3.8% in the first quarter.
Data released by Markit showed that the eurozone services PMI dropped to a record low of 12.0 in April. This figure was slightly higher than the flash PMI released a week ago. As a result, the composite PMI, which combines service and manufacturing, declined to a record low of 13.6.
According to Markit, service providers in the region experienced challenges in April as more people remained at home. These companies faced an unprecedented decline in new orders while input prices dropped by a record low. Besides, this decline happened throughout the region, with services PMI falling to 16.2, 10.2 and 10.8 in Germany, France, and Italy respectively. In a statement, Chris Williamson said:
“The extent of the euro area economic downturn was laid bare by record downturns in every country surveyed in April, with output falling at unprecedented rates across the region’s manufacturing and services sectors.”
Europe retail sales slump
The EUR/USD pair also reacted to weak retail sales numbers from the European Union. Data from Eurostat showed that volume of retail trade declined by 11.2% in March. This was a significant decline since April, when the volume increased by 0.5%. The volume fell by 9.2% on an annualised basis.
According to Eurostat, the biggest contributor to the decline were non-food products and automotive fuels whose prices declined by 23.6% and 20.8% respectively. These declines were offset by a 5% increase in food, drinks and tobacco. Further, the worst-performing countries were Bulgaria, France, and Luxembourg, whose prices fell by 18.1%, 17.4% and 16.4% respectively.
EUR/USD technical forecast
The EUR/USD pair has been declining since March 2018, when it tested a high of 1.2530. On the weekly chart, this price is below the 50-day and 100-day Exponential Moving Average (EMA). It is also stuck at the 78.6% Fibonacci retracement level. Therefore, going by this price action, the path of least resistance for the EUR/USD pair is downward.