Will Euro And Gold Go Up With Pandemic Upturn In Euro Area?

The worst may already be behind the euro area’s economy. This bodes well – both the euro, as well as gold, can benefit from it.

The Governing Council of the European Central Bank met last week, keeping its monetary policy unchanged. The inaction was widely expected - no surprises here. The June meeting could be much more interesting as the ECB will have to decide whether or not to slow its bond-buying under the Pandemic Emergency Purchase Programme that was accelerated in the second quarter of the year. Given the dovish stance of the European policymakers, and the bank’s pledge to provide the markets with favorable financing conditions during the pandemic, we shouldn’t expect any tapering soon.

Certainly, there are important dovish parts of the latest ECB’s statement on its monetary policy. It stems from the grim economic situation in the euro area. The real GDP declined by 0.7 percent in the fourth quarter of 2020, and it is expected to decrease again in the first quarter of 2021. The nearest future doesn’t look promising:

The near-term economic outlook remains clouded by uncertainty about the resurgence of the pandemic and the roll-out of vaccination campaigns. Persistently high rates of coronavirus (COVID-19) infection and the associated extension and tightening of containment measures continue to constrain economic activity in the short term.

However, investors should always look beyond the near-term outlook. In the medium-term, the situation in the euro area looks much better. As the ECB notes, this is because the current virus wave seems to have peaked in Europe, while the pace of vaccination is accelerating:

Looking ahead, the progress with vaccination campaigns, which should allow for a gradual relaxation of containment measures, should pave the way for a firm rebound in economic activity in the course of 2021.

Furthermore, the European Union’s 750 billion euro recovery fund has cleared a key court challenge. Last week, Germany’s constitutional court dismissed objections to the European aid package.

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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 ...

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