EURGBP
The EURUSD pair declined today as the market continued to focus on the bombshell report by the German constitutional court on the legality of quantitative easing. The market is also reacting to a slew of mixed economic data from the region.
To starters, quantitative easing is a process in which a central bank creates new money and makes large asset purchases. The goal is to create enough liquidity in the market and take prices lower. In the past six years, major central banks have acquired assets worth trillions of dollars. In its part, the ECB has acquired assets worth more than $2.2 trillion.
Quantitative easing has always been controversial as you can see in the video below. It has been particularly controversial in Germany, where economists and conservatives have questioned its legality. So, yesterday, while a court said that it was legal, it also threatened to block new purchases of German bonds. It also ordered the parliament and government to ensure that the ECB carried out a “proportionate assessment” of the purchases. Consequently, this ruling means that similar cases can be put in place in other countries.
Meanwhile, in reaction to the ruling, the ECB remained adamant. In a carefully-worded response, the bank said that it was committee to “do everything necessary to ensure that inflation rises to levels consistent with its medium-term mandate.” The bank added that, “the Court of Justice of the European Union ruled in December 2018 that the ECB is acting within its price stability mandate.”
The EUR/USD also reacted to a slew of economic data from Europe. A report by Markit showed that services PMI dropped to a record low of 12.0 in April. This was slightly better than the previous 11.7. Still, it is way lower than the expansion zone of 50.0. As a result, the composite PMI declined to a record of 13.6.
According to Markit, this contraction was broad based in the region. In Germany, the services PMI dropped to 16.2 while the composite PMI dropped to 17.4 from the previous 35.0. In France, the services PMI dropped to a record low of 10.2 while the composite PMI dropped to 11.1. Similarly, the Italian PMI dropped. Earlier today, data from Germany showed that factory orders slumped in March.
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On the four-hour chart, the EURUSD pair dropped to an intraday low of 1.0790, continuing a downward trend that started yesterday. The pair is now below the 50-day and 25-day exponential moving averages, which are making a bearish crossover pattern. Also, the price has moved below the 23.6% Fibonacci retracement level. Therefore, the path of least resistance is lower since bears seem to be in control. As such, they will attempt to retest the previous low of 1.0726.
On the flip side, a move above of EUR/USD 1.0888 will invalidate this thesis. This price is close to the intersection of the 50-day and 100-day EMA. It is also along the 38.2% Fibonacci retracement level.