ForexLive European FX news wrap: Euro stumbles as German court issues ECB QE ultimatum

Forex

Forex news from the European trading session – 5 May 2020

Headlines:

Markets:

  • CAD leads, EUR, CHF lag on the day
  • European equities higher; E-minis up 1.1%
  • US 10-year yields up 2.4 bps to 0.657%
  • Gold down 0.2% to $ 1,698.08
  • WTI up 9.9% to $ 22.40
  • Bitcoin down 0.6% to $ 8,863

ECB
The big story of the session was that the German court ruled to allow the ECB to carry on its QE program but voiced a host of issues/concerns surrounding the matter.

The court deemed the program as ‘unconstitutional’ and delivered an ultimatum that the ECB fixes it within three months, or the Bundesbank will legally not be able to participate.

This presents legal complications as QE will certainly run longer for more than three months and then there’s also the threat this could bring about legal challenges against PEPP.

Not only that, it is also a structural issue since this touches on risks to the euro as well.

The single currency whipsawed on the decision initially, moving to 1.0926 before settling back closer to 1.0900. But as European bonds and stocks sold off, the currency followed as it fell from 1.0900 to 1.0826 before holding just above that currently.

Amid the selloff in European assets, the dollar and yen gained some ground. Cable fell from 1.2450 levels to 1.2421 before recouping those losses.

Meanwhile, AUD/USD also eased from 0.6450 to 0.6417 before paring the decline as stocks bounced back a little in the aftermath of the court ruling decision.

That said, Italian bonds are still sitting much lower on the day as 10-year BTP yields are up by nearly 18 bps to 1.94%. That brings the yields spread between 10-year BTP and Bunds to 250 bps now, reflecting the rising risks in the region.

Elsewhere, oil prices continued to gain more strongly rising to $ 22.40 levels – posting gains of nearly 10%. That in turn is also helping to underpin the loonie on the session.

In other news, the RBA kept policy unchanged in a relative non-event much earlier in the day.

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