German Constitutional Court ruled that the Bundesbank would need to stop its QE bond buying unless the ECB provided justification for the scheme.

The German Constitutional Court ruled that the Bundesbank would need to stop its QE bond buying unless the ECB provided justification for the scheme.

The Euro declined sharply after the ruling with EUR/USD below 1.0850. The dollar overall was mixed and traded in relatively narrow ranges as markets waited for US jobs data.

Risk appetite held firm with equities in positive territory, although gains were limited amid unease that global recovery would be slow. The yen held firm with USD/JPY dipping to 6-week lows before a recovery.

Gains in commodity currencies were hampered by EUR/USD weakness. Sterling was held in narrow ranges with fragile domestic sentiment. Scandinavian currencies made net gains on firmer risk conditions.

In its ruling on Tuesday, the German Constitutional Court stated that the ECB bond-buying programme did not violate the rules on budget deficit financing. It did, however, stated that the German Bundesbank had not provided evidence on whether the bond-buying programme was justified. The Bundesbank would, therefore, must stop buying bonds in three months’ time unless the ECB provided the evidence to justify the buying.

The ruling applied to the regular PSPP programme which started in 2015 and does not apply to the emergency EUR750bn PEPP programme introduced to combat the coronavirus crisis. There was, however, important medium-term uncertainty which undermined Euro confidence, especially with a jump in Italian bond yields, and EUR/USD dipped sharply to lows at 1.0825.

The EU Commission stated that EU law has primacy over national laws while the ECB reiterated it remained committed to taking necessary action.

The US Markit PMI services-sector index was revised lower to record low of 26.7 from the flash reading of 27.0 with output charges declining sharply. The ISM non-manufacturing index declined to an 11-year low of 41.8 from 52.5, although this was above consensus forecasts of 37.0. There were very sharp declines in business activity and new orders on the month with a sharp dip in employment. The headline index was boosted by a substantial lengthening of supplier delivery times while, in contrast to the PMI data, prices increased on the month. Employment data will be key focus over the next few days with ADP data on Wednesday.

Overall reaction was limited with commodity currencies securing slight gains. In this environment, the dollar drifted lower with a limited Euro recovery.

St Louis Fed President Bullard waded into the wider Euro debate with comments that Euro-zone divisions could impede the crisis response. The Euro remained on the defensive on Wednesday and EUR/USD traded around the 1.0830 area. German factory orders declined 15.6% for March, reinforcing concerns over the outlook.

US equity futures held firm ahead of the New York open, although the dollar was held in tight range as the yen remain resilient and EUR/JPY declined to near 3-year lows. The Japanese currency continued to resist selling pressure even with gains on Wall Street.

President Trump stated that he had not talked with Chinese President Xi and that China should have informed the US over coronavirus, although the rhetoric was slightly less inflammatory. Markets were waiting for a response from China and underlying tensions remained higher. The Federal Reserve announced that it would extend the deadline for the return of payroll protection loans. The dollar was, however, unable to make headway and USD/JPY dipped lower to test the 106.50 area.

Asian equity markets made limited headway on Wednesday, although Japanese markets remained on holiday. The yen maintained a strong tone with the low level of yields in major economies curbing potential outflows from Japan. USD/JPY retreated to 6-week lows near 106.25 and EUR/JPY declined to 3-year lows around 115.10.

The final reading for the April PMI services-sector index registered a slight recovery to 13.4 from the flash reading of 12.3, but this was till a record low by a substantial margin with the previous low of 40.1 in November 2008. The composite index declined to 13.8 from 36.0 previously, also a record low. According to the survey, 79% of companies reported a decline in activity for April. There were severe cash-flow constraints and 49% of companies reported a decline in employment while charges declined at the fastest pace in history.

Overall reaction was limited with a steep downturn already priced in. The UK currency gained significant support from the German constitutional court ruling and EUR/GBP dipped to test support below the 0.8700 level.

Trading was relatively subdued in New York with GBP/USD settling around 1.2450 as GBP/EUR touched 1.1500. There were still underlying concerns over coronavirus developments as the UK death toll exceeded that of Italy and the UK currency struggled to gain support from firmer risk appetite.

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