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Divergence in monetary policies

The divergence in monetary policies is a difference in monetary policies adopted by the world’s most systemically important central banks (i.e. the Federal Reserve System, the European Central Bank and the Bank of Japan). These central banks used to synchronize their actions, however, their monetary policies started to decouple in 2014. Investors witnessed the starkest contrast between them in December, 2015, when the European Central Bank eased its monetary policy, while the Fed raised its interest rates. The main cause of the divergence in monetary policies was the fact that the U.S. recovered more quickly than Europe after the Great Recession. Therefore, the Fed started to tighten its stance compared to the ECB’s or BOJ’s actions.

Divergent Monetary Policies and Gold

The divergence in central banks’ policies had significant effects on the financial markets and gold is no exception. The relatively hawkish monetary policy conducted by the Fed in 2014 and 2015 contributed to the appreciation of the U.S. dollar, which exerted strong downward pressure on gold.

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