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German High Court Ruling Puts a Crimp in EUR/USD Rally

Boris Schlossberg, Director of Currency Research, GFT

Top Stories

  • German Consumer confidence bit lower than expected at 6.0
  • German court says EZ panel on aid "unconstitutional"
  • Nikkei up 0.92% Europe up 0.43%
  • Oil at $108/bbl
  • Gold at $1776/oz.

Overnight Eco

  • JPY Retail Trade s.a. (MoM) (JAN) 1.9% vs. -0.2%
  • CHF UBS Consumption Indicator (JAN) 0.92 vs. 0.94
  • EUR German GfK Consumer Confidence Survey (MAR) 6.0 VS. 6.1
  • EUR German Consumer Price Index (MoM) (FEB P) N/A
  • GBP CBI Reported Sales (FEB) N/A

Event Risk on Tap

  • USD Durable Goods Orders (JAN) expected at -1.0%
  • USD Durables Ex Transportation (JAN) expected at 0.0%
  • USD Consumer Confidence (FEB) expected at 63
  • USD Richmond Fed Manufacturing Index (FEB) expected at 10

Price Action

  • USD/JPY 80.00 holds and pair rallies to 80.70 in early Europe
  • AUD/USD stalls at 1.0765 as risk nuetral
  • GBP/USD rallies back to 1.5850
  • EUR/USD takes out 1.3450 but German court ruling weighs

Risk FX remained near session highs in early European trade boosted by support from equities, although the EUR/USD was off its best levels of the day after Germany’s highest court ruled that the parliamentary panel set up to decide on EZ aid was largely “unconstitutional.” Specifically, The Federal Constitutional Court ruled Tuesday that the nine-lawmaker committee can decide only on purchases of government bonds on the secondary market, prohibiting the panel from making any primary  purchases of EZ sovereign debt. Chief Justice Andreas Vosskuhle said the ruling was justified because if word got out "even of plans for such an emergency measure, that would be liable to thwart its success."

The panel, which was set up to expedite decision-making in urgent cases, hasn't started work because the court issued an injunction blocking it last October following a complaint from two lawmakers. The news put a crimp in the EUR/USD rally as traders became concerned that any constitutional challenge in Germany could hinder the effectiveness of the EFSF. However, the negative reaction was minor as the currency market remains more focused on tomorrow’s second LTRO operation by the ECB.

The ECB has clearly taken the center stage in the EZ sovereign debt crisis and remains the principal response mechanism with respect to policy on the matter. Tomorrow’s LTRO will be watched closely for the size of its uptake, but with Greece bailout finally resolved, the focus of the market may now turn to the more prosaic matters of the EZ economy. To that end today’s German consumer confidence numbers continued to show an uptick in sentiment albeit at a slower pace.

German GFK consumer confidence survey for March printed at 6.0 versus 6.1 eyed  rising for the sixth month is row as wage and labor conditions continue to improve in Europe’s largest economy despite the ongoing sovereign debt crisis the region. The income exceptions index was the only sub-index to rise in February as it increased to 41.3 from 34.1 - its highest level since last June. Economic expectations index however fell to 5.9  from 7.5 in January. The proprietary buy index declined as well to 39.2 from 41.8.

The pause in the improvement of consumer confidence sentiment reflects the ongoing concerns regarding the credit market problems on the continent  and suggests that German consumers may be becoming increasingly more concerned about the prospect of raising additional funds for more bailouts in the future. Germany remains in relatively good economic shape, but the latest round of PMI readings from the region has suggested that the rebound from October lows is losing momentum - a fact also reflected in today’s consumer confidence data. Therefore, tomorrow's German unemployment data expected to print at -5K versus -34K the month prior could prove crucial to market sentiment towards the euro this week.    

In the North American session today the market will get a look at the Durable Goods number and the Consumer confidence report. Durable goods are expected to decline from last month’s unexpected 2.2% rise, but confidence is forecast to improve. If the data produces positive surprises it should prove supportive of further equity gains which in turn could spur another round of buying in risk FX. Yesterday’s profit taking was relatively mild and with the key 1.3500 level in view in the EUR/USD the temptation to run stops through the figure will be great if equities prove cooperative in North American trade.

FX Upcoming

Currency GMT EST Release Expected Prior
USD 13:30 8:30 Durable Goods Orders (JAN) -1.0% 3.0%
USD 13:30 8:30 Durables Ex Transportation (JAN) 0.0% 2.1%
USD 15:00 10:00 Consumer Confidence (FEB) 63 61.1
USD 15:00 10:00 Richmond Fed Manufacturing Index (FEB) 10 12