ECB Rate Cut Talk Lifts Gold

The “flight to safety” in the US dollar and Treasury market has eased somewhat over the last couple of days, amid hints that the European Central Bank could announce an interest rate cut following a policy meeting today. The European Commission is also due to release a 156-page document today detailing dramatic new powers that regulators will have to deal with failing banks. Though such regulation will not take effect until 2014, it is adding to the market’s general impression that politicians are slowly getting a grip on the eurozone situation. But with the Spanish finance minister warning yesterday that Spain’s credit markets are freezing up and that his country is “too big” to be rescued by the EU bailout mechanisms, any such market relief may only be fleeting.

As with Asian and European shares, gold and silver have crept slowly higher in trading this morning, fired on by the prospect of looser ECB monetary policy. The ECB is currently targeting 1%, which is slightly higher than the Bank of England’s 0.5% rate, the Federal Reserve’s 0.15% and the Bank of Japan’s rate, which is close to 0.00%. Ordinarily one would expect easier monetary policy to translate into a weaker currency – meaning in this case that the euro would continue to fall against other currencies if the men in Frankfurt cut rates today.

However, the opposite is true at the moment, as the markets reckon looser monetary policy will soften the PIIGS adaption to the rigours of austerity, while easing conditions in Europe’s fragile banking sector. Thus an ECB rate cut today will be seen as “good” for the eurozone and thus euro bullish (somewhat counter intuitively). This should boost the EUR/USD and be good news for precious metals, which usually do best when the dollar is under pressure on foreign exchange markets.

Gold has bested light resistance around $1,625 and is now back above its 50-day moving average. $1,650 has been a continual stumbling block for gold in recent months, so it will be interesting to see how the yellow metal trades once it gets near this mark. Silver is still facing stronger headwinds than gold, given its more industrial profile. Whether it can consolidate back above $30 over the next few days should give good clues as to the short-term direction of this market.