ECB And Fed Dance With Gold At $1,300

ECB’s meeting is behind us, while the gathering of the Fed officials is ahead of us. In the meantime, the price of gold jumped above $1,300. Will it stay for longer?

Slowdown in the Eurozone, but not Recession

On Thursday, the ECB held its monetary policy meeting. It left the policy on hold. The bank also maintained its forward guidance about the future path of interest rates unchanged (they are expected to “remain at their present levels at least through the summer of 2019”). However, in his introductory statementDraghi acknowledged the weaker momentum, caused mainly by an increase in general uncertainty:

the incoming information has continued to be weaker than expected on account of softer external demand and some country and sector-specific factors.

Moreover, the balance of risks deteriorated:

The risks surrounding the euro area growth outlook have moved to the downside on account of the persistence of uncertainties related to geopolitical factors and the threat of protectionism, vulnerabilities in emerging markets and financial market volatility.

The slowdown in Eurozone’s economic growth pushed markets to scale back their expectations of the first interest rate hike – they are pricing in an upward move only in mid-2020, well after the summer of 2019 and the end of Draghi’s term in October. That’s rather headwind for the euro and the price of gold.

However, investors may be too pessimistic. After all, we experience a slowdown, not a downturn or the beginning of a recession. Some of the current downside risks may wane. For example, the specific episode of the car industry in Germany, which contributed to a slowdown in the biggest Eurozone’s economy, will soon wash out – and we will see a rebound in the sector. Or, the trade dispute between China and the US may wane, as the slowdown in the former country will force the Chinese government to make some concessions.

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