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EUR/USD dropped after German ruling

EUR/USD dropped after German ruling

Information is not investment advice

The German court made a surprising decision on May 5 that the European Central Bank's mass bond-buying violates the German constitution. EU executives said that EU law takes precedence. Let’s see who’s right and who’s wrong.

The most important thing is that this situation has made euro very volatile. Investors observed the court decision closely, that’s why EUR/USD fell immediately after it had been released.

The history of ECB’s bond-buying

In 2010 the ECB’s mass bond-buying program started to support Greek economy.

In 2015 the bank launched the 2.7 trillion-euro Asset Purchase Program (APP). Those purchases had to be proportional to the relative size of each EU economy.

In 2020 the 750 billion-euro program was created to support the eurozone amid the coronavirus pandemic.

Where is the problem?

The court ruling refers to the 2015 APP, but not purchases in the coronavirus crisis. However, it can have the huge impact on the eurozone as Germany may pull out of the next ECB's bond purchases.

There is the EU rule that forbids one member to pay directly for the debts of another one. The ECB has found how to avoid this rule: it buys government debts in secondary markets. However, everybody can notice this huge imbalance in the eurozone. Germany is tired of subsiding other EU members and then suffering from it. This help slows down their national economic rebound from the crisis and leads to the weak euro. The ECB credibility is under threat now as Germany is the cornerstone of the eurozone.

What is the outcome?

The German bank gave the ECB the three-month deadline to explain that the ECB's purchases were "proportionate". For these three months the bond purchases will remain unchanged.

Technical forecast

Let’s look at the EUR/USD chart below. The price is moving aggressively down to its recent low level on 1.0725. It even broke through 61.8% Fibonacci level or 1.0837. It looks like it will continue its falling further. However, if it reverses and reaches the 1.0871 level, EUR/USD will increase. Support lines are on 1.0775 and 1.0725.

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