Yesterday, the European Central Bank released its most recent monetary policy statement. What does it imply for the gold market?
The ECB meeting was probably the most awaited event this week. The Governing Council decided that the interest rate on main refinancing operations and the interest rates on the marginal lending facility and the deposit facility would remain unchanged at 0.00, 0.25 and -0.40 percent, respectively.
However, the ECB modified its quantitative easing program. First, it will extend its monthly asset purchases by nine months, from March 2017 to the end of the next year. Second, the bank will reduce its monthly bond buying from €80 billion to €60 billion since April 2017. Third, it will broaden the maturity range of the public sector purchase program by decreasing the minimum remaining maturity for eligible securities from two years to one year. Fourth, the ECB will start buying securities under the asset purchase program with a yield to maturity below the interest rate on the deposit facility.
What do all these changes mean for the ECB’s stance, the U.S. dollar and the price of gold? Well, it is not easy to decide whether the introduced measures are hawkish or dovish. On the one hand, the central bank slowed the pace of asset purchases. This is a hawkish move which probably lies behind the rally in the euro against the U.S. dollar initially after the release of the monetary policy statement.
On the other hand, the ECB extended its monthly asset purchase program and relaxed the rules over which bonds it can purchase under QE. Hence, thanks to the extension and despite the tapering, the total remaining amount of purchases would actually be larger. This is definitely a dovish development, which probably explains why the euro plunged against the greenback after the initial upward move. Actually, the euro suffered yesterday its biggest daily loss against the U.S. dollar since Brexit, as one can see in the chart below.
Chart 1: The EUR/USD exchange rate over the last three days.
The take-home message is that the ECB modified its monetary policy at its meeting in December. The introduced changes were considered dovish on balance, which should strengthen the U.S. dollar. Therefore, the statement is negative for the precious metals market. Indeed, the price of gold declined yesterday. Now, all eyes are on the Fed, which has monetary policy meetings scheduled next week.