EUR/USD pops as ECB prepares for the life without the Bundesbank

EUR/USD pops as ECB prepares for the life without the Bundesbank
  • The ECB is preparing for the possibility where the German Bundesbank would be banned to participate in the QE
  • In this case, the ECB is likely to take the unprecedented legal action against the Bundesbank
  • EUR/USD is trading 0.7% higher on the day on the broader USD weakness

EUR/USD is currently up 0.7% on the day on the broadened USD weakness. Reuters is reporting that the ECB is working on the contingency measures to continue the QE if the German top court forces the German central bank to quit. 

Fundamental analysis: ECB preparing for the unthinkable – life without the Bundesbank

A possible ruling of the German constitutional court that would prohibit the Bundesbank from participating in European quantitative easing has forced the European Central Bank (ECB) to draft contingency measures. In case the Bundesbank is now allowed to continue participating in the QE, its share is likely to be taken by the ECB, Reuters reports citing four sources.

The court has given the ECB until August to justify its buying of government bonds, or it will prohibit the Bundesbank from participating in the QE. As a result, the European Commission has threatened it will sue Germany, while the ECB could take legal action against the Bundesbank.

“The Court of Justice of the European Union ruled in December 2018 that the ECB is acting within its price stability mandate,” the ECB statement noted. 

The ECB could, legally, continue without the Bundesbank, which is its most powerful constituent and the larger shareholder. However, the market is likely to take this separation of the Bundesbank very badly. 

“There is no doubt that such a step would shake the market’s confidence in the ECB’s ability to do ‘whatever it takes’ for as long as it takes. Spreads might widen again and risks to financial stability would rise,” said Marco Annunziata, a member of the ECB’s Shadow Council and the European Council of Economists.

The QE issue could still be resolved peacefully if the Bundesbank is able to justify that the policy was appropriate to ensure economic and fiscal stability in the EU. 

Technical analysis: EUR/USD runs into the key resistance

EUR/USD is trading around 0.7% higher today as the USD continues to trade under the pressure. The pair failed to close near the lows yesterday, which has been used by the buyers to push the price action higher today. 

EUR/USD daily chart (TradingView)

EUR/USD has now runned into the key resistance area, consisting of four different resistance levels. Two key moving averages trade between $1.0960 and $1.1010, in addition to the upper trend line of a symmetrical triangle and the horizontal line. 

All in all, this is a crucial resistance zone. A break of this zone could pave the way for much higher levels. 

Summary

The ECB is preparing for a possible ruling of the top German court that will prohibit the participation of the Bundesbank in the QE, which would provide a major blow to the central bank, Eurozone and euro’s stability. In the meantime, EUR/USD has been trading higher today.

By Michael Harris
Specialising in economics by academia, with a passion for financial trading, Michael Harris has been a regular contributor to Invezz. His passion has given him first hand experience of trading, while his writing means he understands the market forces and wider regulation.
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