Yesterday, the European Central Bank released its most recent monetary policy statement. What does it imply for the U.S. dollar and the gold market?
As in April, the recent ECB meeting was unexciting. Draghi left interest rates unchanged again and neither expanded existing programs nor introduced any new policy measures. The ECB announced the dates when it will start making purchases under the corporate sector purchase program (June 8) and under the targeted longer-term refinancing operations (June 22).
In general, Draghi remained optimistic, as he pointed out that his non-standard monetary policy measures work and foster economic growth. It seems, at least at first glance, that he may be right. Euro area real GDP increased by 0.5 percent, quarter on quarter, in the first quarter of 2016, following a 0.3 percent rise in the last quarter of 2015. Although GDP is believed to slow down in the second quarter of 2016, the outlook for real GDP growth in 2016 has been revised up. Moreover, inflation in euro area increased from -0.2 percent in April to -0.1 percent in May. The outlook for inflation has also been revised up in 2016.
How could the ECB’s last meeting affect the U.S. dollar and the gold market? Well, the euro lost against the U.S. dollar on Thursday (as investors probably turned their attention to today’s critical U.S. jobs report). In turn, the price of gold went down marginally on the day. Importantly, the ECB’s inaction prepares the ground for a Fed hike in June or July. The case for a move is strengthened by the Fed’s tightening its balance sheet, in preparation for a hike, similarly to what it did before its December move.
The markets odds of a raise suggest that investors are not ready for June, however, July is a completely different story. Anyway, the chances of a hike this summer increased and gold will be under downward pressure for some time. Investors should remember that even if the FOMC does not hike in June, it will probably sound very hawkish to set the stage for a July move (unless, of course, there is a panic in the stock market triggered, for example, by Brexit). Such a scenario will be obviously negative for the gold market.
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.