This week, two member of the European Central Bank’s (ECB) governing council gave speeches. What can we learn from them?
On Tuesday, Yves Mersch, the member of the Executive Board of the ECB, delivered a speech at MNI Connect event in Singapore. His comments were in line with Draghi’s previous remarks. Mersch pointed out that “the global recovery is firming and broadening”, while and “the ongoing economic expansion in the euro area provides confidence.” He even reiterated the opinion that the deflation risk was no longer present: “the thread of deflation is gone and reflationary forces are at play.” However, Mersch noted that inflation remained subdued, so the the ECB’ support was still needed:
“A very substantial degree of monetary accommodation is still needed for underlying inflation pressures to gradually build up and support headline inflation developments in the medium term.”
On Wednesday, just minutes before the FOMC recent monetary policy statement was published, Ewald Nowotny, an Austrian central bank governor and prominent member of the ECB’s Governing Council, held a press conference. He said that the ECB could reduce asset purchases from the beginning of 2018, but it should not completely give up buying bonds. Nowotny reiterated Draghi’s and Mersch’s previous comments and noted that economic growth had picked up strength, while the threat of deflation had gone. Hence, he said that the ECB had room to curb stimulus but only moderately since inflation remained far below its 2-percent target:
“When I say that it is reasonable to ease up on the accelerator, I mean – and I think the Bundesbank has the same point of view – that we can slightly reduce the volume of asset buys (…) It means you don’t step hard on the brake, so I do not assume that [quantitative easing] will end at the end of the year without replacement.”
These remarks indicate that the ECB really wants to reduce its stimulus, which is set to run until the end of 2017. The ECB will taper its quantitative easing program, but the tightening program will be very gradual and cautious. Nevertheless, the upcoming reduction of the ECB’s stimulus is good news for the gold market. The Fed’s tapering was negative for the yellow metal, so given the importance of the EUR/USD exchange rate for the gold market, similar actions from the ECB should support the price of gold.
Of course, it does not mean that the US dollar is doomed to fall out of favor, especially that the Fed is still tightening. However, the recent developments in central banking have been supportive for the euro and gold, on the margin. A lot will depend on the level of current – and expected – divergence in monetary policies of the Fed and the ECB. Stay tuned!
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.