Gold Unfazed By Weaker Euro As ECB Removes Lower Rate Bias
(Kitco News)- Thegold market has shown some resilience Thursday in the face of a weaker euroafter the European Central Bank removed its lower rates bias following amonetary policy meeting.
However,gold has seen renewed weakness following the North American equity open.
Inhis press conference following the central bank's monetary-policy decision thatleft interest rates unchanged, ECB President Mario Draghi said that policymakersremoved the lower rate bias since "deflation risks have definitely gone away."
Theyellow metal, while under pressure from technical selling after seeing a pushto key resistance levels earlier in the week, saw little volatility duringDraghi's press conference, despite the euro falling to a five-day low againstthe U.S. dollar. Historically, the euro has a strong positive correlation withgold because of its significant weight in the U.S. dollar index.
Althougha weaker euro has had little impact on gold, a positive North American equityopen has created significant profit taking in the gold market. August goldfutures is just off session lows, last trading at $1,278 an ounce, down morethan 1% on the day.
Whilethe central bank is not expecting to lower interest rates further into negativeterritory, it is maintaining its monthly asset-purchase program. Draghi addedthat the council has still not had any discussion on whether the program willbe extended or end by the end of this year.
Althoughthe ECB doesn't see deflation as a major concern, it still has to deal withweak price pressures. In updated projections, the bank sees inflation rising to1.5% by the end of this year, down from April's forecast of 1.7%; next yearinflation is expected to rise only 1.3%, down significantly from the previousforecast of 1.6%. Inflation is forecasted to rise 1.6% in 2019, down from theprevious estimate of 1.7%.
Whileinflation was downgraded, the central bank was a little bit more optimistic oneconomic growth. According to updated projections, the ECB sees the euro zonegrowing by 1.9% this year, up from April's forecast of 1.8%; next year theregional economy is expected to grow 1.8%, up from the previous forecast of1.7%; and 2019 is expected to see growth of 1.6%, up from the previous forecastof 1.6%.
"The risks surrounding the euro-areagrowth outlook are considered to be broadly balanced. On the one hand, thecurrent positive cyclical momentum increases the chances of a stronger-than-expectedeconomic upswing. On the other hand, downside risks relating to predominantlyglobal factors continue to exist," Draghi said in his opening statement.
Draghidismissed the weaker inflation expectations as the result of lower food andenergy prices. He added that while subdued wage growth has an impact on the lowinflation profile, this is expected to change as the euro zone is seeing strongjob growth in the current economic recovery. He noted that job growth in the eurozone is the strongest in the world.
"Weare more confident inflation will rise to our target in a durable way," hesaid. "The council trusts the strength and power of the purchase program."
Whiledeflation risks have disappeared, Draghi didn't rule out a further extension ofthe central bank's asset-purchase program if inflation continues to weaken. Healso added that the central bank could even include its lower rates bias againif conditions warrant it.
By Neils ChristensenFor Kitco News
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nchristensen@kitco.comwww.kitco.com Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in precious metal products, commodities,securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.  |