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The weak euro supports inflation and fears the ECB. It will increase rates

François Villeroy de Galhau, a member of the ECB Board of Governors and the Governor of the French Central Bank, said François Villeroy de Galhau.

At the end of last week, the single European currency was the lowest against the dollar since 2017. The weak euro made the dollar import goods and the more expensive goods – such as oil – boosted price pressures that had already driven inflation in the euro area at one level. record 7.5 percent, thus well above the ECB’s long-term target.

“I would like to emphasize that we will closely monitor the development of the effective exchange rate, which is a major driver of import inflation.” Too weak a euro would thwart our goal of price stability, “Villeroy de Galhau told a conference French central bank on Monday.

Villeroy de Galhau added that a “decisive” meeting of the ECB’s Governing Council could be expected in June, followed by an “active summer” in the area of ​​monetary policy. According to him, it should at least move towards neutral tuning, which will not only stimulate the economy, but also slow it down.

The ECB’s deposit rate is now -0.5 percent, which means that banks charge a fee for depositing funds available at the central bank. The primary interest rate then remains at a record low of zero percent.

Increased since summer

The ECB should start raising rates and fighting inflation this summer, as its member Villeroy de Galhau said last week. The head of the European Central Bank, Christine Lagarde, and other central bankers also expressed a similar view. According to Bloomberg, market bets indicate an increase in the ECB’s key interest rate by a percentage point this year.

At the same time, several bankers indicated that they were in favor of raising interest rates at the July meeting, mainly due to the rapid rise in inflation. It remains well above the ECB’s 2% target, which was also higher than inflation in April, excluding the impact of energy and high food prices.

For now, the central bank left its monetary policy unchanged last month. Her boss, Christine Lagarde, said last week that the ECB was likely to end its bond-buying program in early Q3 and may begin raising interest rates a few weeks later. It boosted market expectations that the ECB would raise interest rates for the first time in more than a decade in July.

Most other major central banks have already increased lending costs, such as the Czech National Bank, which raised key interest rates to 5.75 percent in early May, the highest level in more than 20 years.

Parity after 20 years?

On the contrary, the value of the European currency is weakened by the uncertainty surrounding Russian gas supplies. At the same time, the outlook for the European economy is deteriorating. Ongoing talks with Moscow over the continent’s natural gas supply could slow economic growth, as predicted by the IMF.

The current situation thus leads some banks to predict that both currencies will reach parity this year. That is, a euro will cost a dollar. Large currencies also expect a further decline in the euro towards equality. In the last month alone, bets on a further weakening of the euro have risen to seven billion.

EUR / USD is approaching parity.

“The euro itself is not currently an attractive currency,” Francesco Pesole, ING Bank’s monetary strategist, told Bloomberg. Although the Dutch bank maintains its official forecast for the euro at 1.05 EUR / USD for the next six months, Pesole admits that, given the strength of the dollar and market volatility, parity is likely to be reached.

However, not all views on the further development of the euro are negative. Roberto Mialich, UniCredit’s monetary strategist, expects the euro to rise above 1.10 EUR / USD next year as the Fed’s rate hike cycle stops.

“I see a scenario of a permanent fall below par only as a side risk, which is likely only if economic growth in the euro area falls more than expected,” says Mialich.

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