Super Wednesday is behind us! The masters of monetary policy have revealed their cards. The Fed released the fresh minutes, the ECB held its monetary policy meeting, while the Brexit was postponed again. How will all these play out in the gold market?
Minutes Show Patience among the FOMC Members
The minutes from the pivotal FOMC meeting show that the Fed saw the first-quarter economic slowdown as transitory and that the real GDP growth would bounce back solidly in the second quarter. Although the yield curve inverted for a while, the central bankers noted that the unusually low level of term premiums in longer-term interest rates has made the yield curve a less reliable economic indicator.
However, although the policymakers do not see recession for the United States in the near future, they are not going to hike interest rates this year. Indeed, the key paragraph of the March minutes is as follows:
With regard to the outlook for monetary policy beyond this meeting, a majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.
Hence, the Fed stressed again that it will remain patient for now. A more dovish Fed implies lower real interest rates and, thus, weaker tailwind for the US dollar.to appreciate. From the fundamental point of view, these factors should support the gold prices. However, investors should remember that one of the reasons why the US central bank softened its stance on monetary policy is subdued inflation. We are, of course, aware that the CPI rose 0.4 percent on March, but the core inflation rate declined from 2.1 to 2.0 percent on an annual basis. Gold bulls would definitely prefer a much stronger price pressure.
The ECB Confirms Economic Slowdown, but Does Not Change Its Policy
As expected, the ECB kept the monetary policy parameters unchanged on Wednesday. However, Draghi noted that the recent data "confirms slower growth momentum extending into the current year". Indeed, the IMF sharply downgraded growth in the euro zone one day earlier. It now expects the bloc to grow at 1.3 percent in 2019 - compared to 1.6 percent forecasted six months ago. Moreover, the balance of risks remained negative, as the ECB President pointed out that "the risks surrounding the euro area growth outlook remain tilted to the downside."
Hence, the ECB has been recently forced to backtrack its monetary tightening plans amid the global economic slowdown. It's likely now that Draghi will not deliver a single interest rate hike before his presidency ends later this year. A less hawkish ECB makes for a weaker euro against the US dollar, which should undermine gold's appeal. However, Mr. Draghi did not say anything revolutionary, so the impact on the precious metals market would be likely limited. Indeed, the EUR/USD fell yesterday, but then it quickly rebounded, as the chart below shows.
Chart 1: EUR/USD exchange rate from April 9 to April 11, 2019
Implications for Gold
What does it all imply for the gold market? Well, the price of the yellow metal rose yesterday, as one can see in the chart below.
Chart 2: Gold prices from April 9 to April 11, 2019
Major central banks being dovish, the Fed in particular, combined with the uptick in the American CPI, provided some support for the gold prices. But gold investors should be aware of headwinds later this year. We refer here to the fact that the markets see a more than 50 percent chance of a Fed rate cut this year. But there is little in the minutes that warrants a rate cut by December. If the market expectations adjust, gold may struggle. Another issue is that the European Union leaders agreed yesterday to grant the British Prime Minister Theresa May a new Brexit deadline of October 31, 2019. As the Brexit has been postponed, the risk appetite may strengthen among the market participants, affecting negatively the safe haven assets.
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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.