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EUR/USD Susceptible to Dovish ECB Guidance amid German Court Ruling

EUR/USD Susceptible to Dovish ECB Guidance amid German Court Ruling

David Song, Strategist

EUR/USD Rate Talking Points

EUR/USD struggles to hold its ground as the German Constitutional Court warns that some of the actions taken by the European Central Bank (ECB) isn’t backed by the EU Treaty, and the Euro may face a more bearish fate over the coming days as the Governing Council retains a dovish forward guidance for monetary policy.

EUR/USD Susceptible to Dovish ECB Guidance amid German Court Ruling

EUR/USD gives back the advance following the ECB meeting as the central bank faces a three-month deadline to justify the Public Sector Purchase Programme (PSPP), and the exchange rate may continue to retrace the advance from the April low (1.0727) as it carves a series of lower highs and lows.

It remains to be seen if the ruling will alter the course for monetary policy as the ECB reiterates that “the Governing Council remains fully committed to doing everything necessary within its mandate to ensure that inflation rises to levels consistent with its medium-term aim,” and President Christine Lagarde and Co. may continue to endorse a dovish forward guidance at the next meeting on June 4 as the “growth scenarios produced by ECB staff suggest that euro area GDP could fall by between 5% and 12% this year, depending crucially on the duration of the containment measures.”

In turn, the ECB may continue to rely its non-standard measures to support the monetary union as the central bank remains reluctant to push the main refinance rate, the benchmark for borrowing costs, into negative territory, and the Euro may face headwinds throughout 2020 as the Governing Council remains “fully prepared to increase the size of the PEPP (Pandemic Emergency Purchase Programme) and adjust its composition, by as much as necessary and for as long as needed.”

As a result, Vice-President Luis de Guindos may strike a dovish tone when he presents the ECB Annual Report to the Committee on Economic and Monetary Affairs of the European Parliament, and EUR/USD may face a more bearish fate ahead ofthe Non-Farm Payrolls (NFP) report as the Governing Council keeps the door open to further utilize its unconventional tools.

With that said, EUR/USD may continue to retrace the advance from the April low (1.0727) as the rebound failed to produce a test of the April high (1.1039), and the exchange rate may exhibit a more bearish behavior as it carves a series of lower highs and lows.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, the monthly opening range has been a key dynamic for EUR/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 1, with the high for November occurring during the first full week of the month, while the low for December happened on the first day of the month.
  • The opening range for 2020 showed a similar scenario as EUR/USD marked the high of the month on January 2, with the exchange rate carving the February high during the first trading day of the month.
  • However, the opening range for March was less relevant amid the pickup in volatility, with the pullback from the yearly high (1.1495) producing a break of the February low (1.0778) as the exchange rate slipped to a fresh 2020 low (1.0636).
  • Nevertheless, EUR/USD may trade within a more defined range as the advance from the April low (1.0727) failed to produce a test of the 1.1040 (61.8% expansion) region, which lines up with the April high (1.1039),
  • A break/close below the 1.0830 (78.6% expansion) to 1.0860 (23.6% retracement) opens up the 1.0780 (100% expansion) region as the exchange rate carves a series of lower highs and lows.

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.