EUR/USD pares earlier gains, falls back to 1.0400 despite ECB Villeroy’s comments

• EUR/USD has fallen back to near 1.0400 after comments from ECB’s Villeroy gave it a boost earlier in the day.
• Risks remain tilted to the downside amid Fed/ECB monetary policy divergence, as well as a diverging Eurozone/US economic outlook.

The euro got a short-lived boost from comments from the head of the French central bank head Francois Villeroy de Galhau during early European trade, with Villeroy noting the bank will be carefully monitoring developments in the FX rate, which has been a significant driver of imported inflation. A euro that is too weak would go against the ECB’s objective of price stability, Villeroy added, in comments that suggest the recent euro downside is increasing concern at the ECB.

But a broadly downbeat tone to risk appetite and weakness in the yuan in wake of the latest downbeat Chinese Industrial Production and Retail Sales data for April which kept global growth concerns in focus have capped any rally. EUR/USD nearly hit 1.0440 but has since fallen back to around 1.0410, where it is back to trading flat on the day as FX markets turn their attention to upcoming risk events later in the week.

US Retail Sales data will be released on Tuesday prior to the US open and then Fed Chair Jerome Powell will be speaking later on in the day. He is expected to reiterate his recently espoused stance, and the stance also being unanimously espoused by other Fed policymakers including NY Fed President John Williams on Monday, that inflation is unacceptably high and, as a result, interest rates need to be lifted “expeditiously” towards neutral.

Even as the ECB turns more hawkish (Villeroy said June’s meeting would be “decisive”, teeing up hikes for July), traders remain reluctant to buy into EUR/USD rallies with the Fed still substantially more hawkish by comparison. Divergence in economic outlook between the Eurozone and US is another factor weighing on the pair’s long-term prospects, with the impact of the yet to be agreed upon EU ban on Russian oil imports on the bloc’s economy still not known. Many strategists are still calling for EUR/USD to hit parity in the weeks/months ahead.