German Central Bank Isn’t Backing Crisis Backstop – EUR/USD in Danger

The German central bank, the Bundesbank, is reportedly rejecting the OMT program of the ECB. According to the German paper Handelsblatt, the Bundesbank, a member of the ECB, says that the Constitutional Court should reject the OMT.

The mere existence of the OMT, a program that details when the ECB would buy bonds, has definitely helped stabilize the situation in Europe in the past 9 months or so. But if Germany doesn’t back the backstop, who will?

EUR/USD is already sliding, but the pair is still around 1.30. For more levels of the euro, see the EURUSD forecast.

The Bundesbank, led by Jens Weidmann, says according to the report that the OMT creates credit risks that undermine central banks. Yields of Spain and Italy have fallen quite nicely in recent months and especially in recent days.

Another driver of lower yields (and a stable euro), has been the huge decision of the Japanese central bank to buy bonds in huge quantities. This has pushed money also into Europe. Yet without a backstop, these flows could go elsewhere, perhaps to the US.

Live chart of EUR/USD:

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