Euro Outperforms, Villeroy Comments Noted
- Written by: Gary Howes
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Above: File image. Francois Villeroy de Galhau, Governor Banque de France, Image: Deutsche Bundesbank, Nils Thies.
Euro exchange rates are firm at the start of the new week and at least some of the rally could be attributed to comments by a prominent member of the European Central Bank (ECB).
ECB Governing Council member François Villeroy de Galhau expressed concern that the Euro was too weak and was therefore contributing to inflation.
"Let me stress this: we will carefully monitor developments in the effective exchange rate, as a significant driver of imported inflation," Villeroy told a conference at the Bank of France.
Some currency analysts had been warning that the ECB might have to raise interest rates to defend the Euro's value in order to bring down inflation.
Ongoing Euro weakness makes imported dollar-denominated goods and commodities such as oil and gas more expensive, fuelling price pressures that have already driven euro zone inflation to record levels.
The Euro reached its lowest level against the U.S. Dollar since 2017 last week.
Villeroy's comments add credence to the argument the ECB could therefore be prepared to raise rates on a number of occasions in 2022 to boost the Euro's value.
"A euro that is too weak would go against our price stability objective," he said.
Villeroy said that a "decisive" ECB governing council meeting could be expected in June followed by an "active summer" on the monetary policy front.
He suggested the ECB might be minded to raise interest rates "towards the neutral rate", implying a move to 0% in the main Deposit Facility rate.
Eurozone money markets now show investors are pricing in 95 basis points of ECB rate hikes in total by year-end, this compares to roughly 80 bps priced in on Friday.
The move higher in interest rate expectations would exert a mechanical pull higher on the Euro.
The Euro to Dollar exchange rate is quoted a third of a percent higher at 1.0432 at the time of writing, the Euro to Pound rate is up 0.57% at 0.8532, giving a Pound to Euro conversion of 1.1720.
