EUR/USD in tight range as European Commission threatens to sue Germany

EUR/USD in tight range as European Commission threatens to sue Germany
  • The EUR/USD pair wavered as the European Commission said it was considering suing Germany.
  • The decision comes after a German court ruled on quantitative easing, a popular monetary policy tool.
  • The pair is also reacting to a second wave of coronavirus infections in Europe and Asia.

The EUR/USD pair was little changed today as the market reacted to news of confrontation between the European Commission and Germany.

EUR/USD little changed

EUR/USD wavers
EUR/USD wavers as the European Commission feuds with Germany

European commission threatens to sue Germany

The EUR/USD pair wavered today after the European Commission warned that it will sue Germany. The confrontation between EU’s institutions started last week when a German court overruled a previous ruling by the European Court of Justice (ECJ) on the legality of Quantitative Easing (QE).

In a ruling last week, a German constitutional court threatened to block fresh purchases of German bunds by the bank. The judges also asked the German government to ensure that the bank carried out a proportionality assessment on the QE. In addition, the judges argued that the practise constitutes a risk that encroaches on the competencies of parliaments.

You can read the English version of the German court ruling here.

In response to the ruling, the ECB said it would continue to do “everything within its mandate to ensure that inflation rises to levels consistent with its medium-term aim.” The bank also said that it was answerable to the European Parliament and the Court of Justice of the EU. And, in a statement, Ursula von der Leyen said, “the final word on EU law is always spoken.”

According to Bloomberg, it is possible for the European Commission to sue a member country. The easiest route will be to file infringement proceedings against Germany in the ECJ, the same court that the German court accused.

In a statement, Wolfgang Schaeuble, a former German finance minister said:

“It’s very possible that the existence of the euro is now put into question in other European Union member states because every national constitutional court can decide for itself. This situation makes nobody happy.”

German court rules against QE

To starters, QE is a relatively new monetary policy tool that central banks started to experiment with in 2009. In it, a central bank “prints” money and buys financial assets like government and corporate bonds.

By acquiring these assets, the bank ensures that there is adequate money in the financial system. It also ensures that yields in the assets being purchased rises. As the assets price rise, a wealth effect is created, leading to increased stability in the financial market.

The ECB has acquired assets worth more than $2.8 trillion while the Fed has expanded its balance sheet to more than $6 trillion. The BoJ, BOE, and the RBA are the other banks that have acquired billions worth of assets to stabilise the market.

ECB balance sheet
ECB balance sheet soars

At the same time, QE has not been popular in Germany, where academics have written papers and sued the ECB against the process. Last week, while a German court ruled that QE was legal, it asked the government and parliament to conduct a proportionality assessment to ensure that its benefits outweigh the risks.

The EUR/USD is probably reacting because, left unchallenged, other courts in the European Union countries could challenge its legality. By so doing, this would deny the ECB an important monetary policy tool.

EUR/USD technical outlook

EUR/USD
EUR/USD technical outlook

On the four-hour chart, the EUR/USD pair declined to an intraday low of 1.0800. The price is slightly below the 100-day and 50-day EMA and is between the 61.8% and 71.8% Fibonacci retracement level. The pair may continue falling, as the bears attempt to retest the 71.8% retracement level at 1.0787.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.
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