The British pound is higher against the euro on Tuesday.
The euro took a turn for the worse when Germany’s constitutional court ruled that some aspects of the European Central Bank’s quantitative easing (QE) program is unconstitutional and ordered Germany’s Bundesbank to stop buying government bonds within three months.
QE tends to be negative for a currency but the German court ruling raises so-called “breakup risk” for the euro, namely that the euro system breaks up.
GBP/EUR was higher by 61 pips (+0.55%) to 1.1463 as of 4pm GMT.
The currency pair moved steadily higher throughout the day, first abo0ve 1.14 then finding resistance again at 1.15. Yesterday the exchange rate rose +0.18%, leaving weekly gains of +0.71%.
GBP: UK final services PMI implies -7% GDP
There was some small sense of relief that the final reading for the April services PMI came in above the initial estimate (13.4 vs. 12.3). However, the record declines in activity, new orders and employment remain of huge concern. It’s far from a foregone conclusion that all these factors instantly recover when lockdowns are eased.
EUR: German court decision a blow to PEPP
The market reaction was to tentatively send the euro lower to the German court decision that poses some future risks but not immediate ones. For the next three months, the ECB will continue its asset purchases, which should hopefully take it through the worst stages of the lockdown in most countries. The ECB is set to discuss the German court ruling in a meeting today at 1600 GMT.
The court is looking for the ECB to demonstrate in the next three months via a new decision that the monetary objectives pursued by the PSPP- the name given to the latest QE program are not disproportionate. Then even more specifically, the court is looking for the Bundesbank to set out an exit strategy for how to sell the bonds in its portfolio.
Thing will get thornier in three months if, as many suspect the economic consequences of the current upheaval last for many months, requiring ongoing monetary support for the Eurozone economy.
