Gold Eases Ahead Of FOMC Minutes

Gold remains defensive within the range established Monday as the dollar continues to gain ground. The dollar index pushed to new 7-week highers above 81.00, underpinned by improved U.S. economic data and a weaker euro.

The euro has retreated in recent sessions amid rising expectations that the ECB may offer further accommodations as soon as tomorrow’s policy meeting. Certainly, economic growth in the eurozone remains moribund. The ECB chief economist Peter Praet calls the recovery “muted and fragile.” Staff projections from the central bank see 2013 GDP at -0.4%, while 2014 growth is expected to be +1.1%.

However, policymakers are now quite concerned about the rising risk of disinflation/deflation in Europe. As of December, the inflation rate had fallen to just 0.8% y/y, well below the ECB’s target, while PPI is a disturbingly low -1.2% y/y (Nov).

With the ECB policy rate at a record low 0.25%, the central bank is unlikely to take rates to 0% at this point. However, Draghi has adamantly declared in recent months that all policy tools are on the table. Another LTRO and a negative deposit rate have been discussed, with the latter the most likely next-move. The ECB is unquestionably still in an easing mode.

Minutes from the December FOMC meeting come out at 2:00ET today. The market will be examining the minutes closely to determine the likelihood of continued tapering. Most analysts foresee incremental $10 bln cuts to asset purchases, presuming that the data continue to be generally supportive.

Today’s ADP employment survey for December beat expectations at +238k, consistent with the recent string of moderate jobs gains. December nonfarm payrolls comes out on Friday, with consensus hovering right around +200k.

Now that the first taper is behind us, the market doesn’t seem to be nearly as fixated on tapering as it had been for the last six-months of 2013. It might now be more interesting if the Fed opts not to further reduce asset purchases. Certainly if the data deteriorates at some point and Yellen ratchets QE back up, that would be big news.