ECB’s Villeroy Says Negative Rates are an Effective Policy Tool

Negative interest rates are an effective policy tool, Villeroy, an ECB Governing Council member said on Thursday. How did the dovish comments impact the EUR/USD?

May 28 2020 | AtoZ Markets – The European Central Bank (ECB) Governing Council Member and Bank of France Governor Francois Villeroy de Galhau stated today that the negative interest rates are an effective policy tool. He also noted, however, that households and companies should not be provided with negative lending rates.

ECB’s Vice President Luis de Guindos stressed yesterday that “there is no alternative to current ECB monetary policy of negative rates.”

On the dovish comments from the ECB policymaker Villeroy, EUR/USD lost momentum and receded to sub-1.10 The pair is down 0.06% at 1.0996, with lows hit at 1.0992.

EUR/USD gained traction following EU’s proposed €750 billion virus recovery fund

The EUR/USD pair rallied in early trading on Wednesday to trade at levels not seen since the beginning of April. The pair shows strong potential for further upside although it may be too soon to call it a breakout. The exchange rate turned sharply higher last week when leaders from France and Germany initially discussed a further stimulus plan to help out the economies hit hardest by COVID-19.

There was some push back from the original proposal as some member states opposed the idea of providing grants as a form of a stimulus.

The European Union discussed a new package yesterday, worth as much as 750 billion euros, that will be distributed in the form of grants and loans. Italy and Spain are expected to be the main beneficiaries of the package, set to receive 81.8 billion euros and 77.3 billion euros respectively.

Approval is still required from all of the member states and ongoing developments stand to move the exchange rate.

Aside from stimulus talks, continued strength in risk assets has weighed on the dollar which has further boosted the EUR/USD pair.

German CPI/US macro data in focus

Moving ahead, market participants now look forward to the release of the flash version of the German CPI for some impetus. Later during the early North American session, a slew of important US macro data will influence the USD price dynamics and produce some meaningful trading opportunities.

Thursday’s US economic docket highlights the release of the second estimate of Q1 GDP, Durable Goods Orders for April, and the Initial Weekly Jobless Claims.

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