Euro-Dollar Outlook: "A Significant new Risk has Arisen" says Lombard Odier

- EUR/USD recovery delayed says Lombard Odier
- Cite ruling by German court
- ECB's hands now tied on future policy decisions

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The Euro is being tipped to remain subdued through the remainder of 2020 as a long-awaited recovery against the Dollar is put on hold by a ruling in a German court over European Central Bank policy, that will ultimately restrain the central bank's ability to fully support the Eurozone economy.

Analysts at Lombard Odier - a Swiss private bank - say they have ditched a constructive view on the Euro-to-Dollar exchange rate's outlook following the findings of Germany's Second Senate of the Federal Constitutional Courts that elements of the European Central Bank's flagship quantitative easing programme were potentially unconstitutional.

The Euro fell across the board after the court ruled that Germany's Bundesbank would no longer be allowed to be part of the ECB's quantitative easing programme unless the ECB addresses key issues within three months. The Bundesbank is a key pillar in executing the ECB's policy of siphoning up billions in Eurozone government debt to keep the economy ticking over, but the court ruled elements of the programme to be unconstitutional.

For the Euro, "a significant new risk has arisen" as a result of the ruling, according to Vasileios Gkionakis, Head of FX Strategy at Lombard Odier.

"All this does not necessarily mean that EUR/USD is about to collapse," says Gkionakis, however, "some sort of near-term damage has been done."

Lombard Odier maintain a view that the ECB will ultimately do enough to satisfy the German court's demands, thereby allowing the Bundesbank to maintain its pivotal presence in the ECB's quantitative easing programme.

But, Gkionakis says there is now a higher risk that the German court ruling could affect future decisions on the size and composition of additional asset purchases and actions taken by the ECB to support the economy.

"The move has set a precedent that increases the risk of similar legal battles between national courts and their national central banks across member states. Finally, it is possible that the decision could pave the way for the PEPP to come under similar legal scrutiny," says Gkionakis.

EURUSD forecasts

The Euro had been expected to maintain a gradual, yet decisive, path of appreciation against the Dollar over coming months by Lombard Odier who estimate the single-currency to be undervalued by 9% on a long-term basis against the U.S. Dollar.

The German court ruling now sees strategists turn neutral on the EUR/USD outlook, believing the bar for significant appreciation has risen.

"We turn neutral (and for the moment abandon our plans to overweight EURUSD in our portfolios). We cut our forecasts to 1.09 for H1 2020 and to 1.11 for the end of the year. We allow for some very small appreciation mainly due to the broader USD downside we envisage for H2 2020," says Gkionakis.

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EURUSD forecasts