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Critical Week for the Euro

With many traders and investors preparing for holidays, the Euro enters one of its most important weeks since its introduction. The Bundesbank’s President, Jens Weidman, must respond to the German constitutional court ruling that some of the ECB asset purchases were “illegal”. 

The APP or the Asset Purchase Program which started in 2015 is at the core of the Euro’s recent troubles. While the Karlsruhe-based court did not find any violation of monetary financing, it did consider that the European Court of Justice acted beyond its authority in establishing the proportionality of the APP program.

August 5th – Karlsruhe Deadline

As it happens, two days from now, the Karlruhe’s deadline requires an answer from Bundesbank. If the ECB did not respect proportionality, then the Bundesbank participation in the APP program was illegal.

This may all sound very boring to the average reader, but the legality of the APP purchases is enough to bring down an entire financial system. The Euro as we know it just entered one of the most important weeks in its history, and cautious traders already took some chips off the table.

The big question is how the Bundesbank will react two-days from now. Behind closed doors, there are surely some discussions regarding the best way to proceed. However, we may not find more details as Bundesbank may simply decide not to respond in any way to the German court ruling.

However if it does, and it provides a final say on the proportionality matter, the risk is that the Euro will fall off a cliff. So far, the Bundesbank’s President was silent on the matter. It is also unlikely that the financial media will not put pressure on a proper answer to be delivered.

The Euro enjoyed one of its best periods since the coronavirus pandemic outbreak. The trust in the European project surged to unprecedented levels since the EU Summit deal laid the foundation for common debt issuance. The strong, united response in front of the health crisis generated an almost unprecedented response from the investing community.

Yet all this is now in danger. The German court ruling earlier this year is there to remind everyone of the legal flaws that still exist in the European project. Sure, there is a will to solve all possible issues, but it usually takes a lot of time – something precious, especially in an economic recession.

Fasten your seatbelts ahead of August 5th. The Euro may rock the boat.

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