Global financial markets will be taking their cues from U.S. Federal Reserve and European central bank policy meetings to be held by the Fed on Tuesday and Wednesday and by the European Central Bank (the ECB) on Thursday.
The consensus among economists who pay attention to these things suggests there won’t be any significant change in Fed policy . . . but, in contrast, there is a strong belief that the ECB will cut European interest rates from their already record low levels.
ECB Expectations
The ECB has seen a disappointing string of European economic data over the past several weeks. Even Germany, which had earlier seemed immune from the deteriorating conditions elsewhere in the 17-nation eurozone, is beginning to feel the pinch.
A cut in European interest rates could be a mixed blessing for gold. Here’s why: Lower European rates could adversely affect the euro in world currency markets . . . making the dollar appear stronger. And, dollar strength has often — but not always — been a short-term negative for gold. It could be that the markets have already priced in a weaker euro/stronger dollar, in which case there may be little gold-price reaction.
Longer term, stimulative ECB monetary policies will be a big plus for gold, not only its euro-denominated price but, reflecting higher aggregate global gold demand, as big plus for the U.S. dollar-denominated price as well.
U.S. Economic Trends
Today’s news on the U.S. economy, with consumer spending up a modest 0.2 percent in March, along with other recent indicators, suggest the feeble recovery may not have sufficient firepower to sustain positive growth, let alone engineer any meaningful reduction in unemployment.
Recent GDP data excluding erratic business inventories, which is the broadest measure of economic performance, puts U.S. economic growth in the first quarter at only 1.5 percent, down from 1.9 percent in the fourth quarter of 2012 and 2.4 percent in the third quarter — taken together not a reassuring trend.
Misguided U.S. fiscal policies — the recent hike in Federal payroll taxes and the sequestration-related spending cuts and layoffs — are already impeding consumer and business spending . . . and this fiscal drag will increasingly retard economic activity in the months ahead.
Meanwhile, global economic trends are also impede U.S. growth: The deepening European recessions and slowing activity — in many of the emerging economies — along with a rising dollar exchange rate against the currencies of important foreign markets for U.S. exports is also retarding growth here in America.
Fed Policies
All of this will be on the minds of policy-makers at the Fed when they meet on Tuesday and Wednesday this week. No doubt their discussions will focus on the economy’s vulnerability, along with the unacceptably high rate of unemployment and the below-target rate of consumer price inflation rate. The core inflation rate (excluding food and energy) for personal consumption expenditures was only 1.1 percent in the first quarter, well below the Fed’s target rate of 2 percent
Although we, along with most other Fed watchers, do not expect any explicit change in monetary policy, the market’s will be parsing Fed Chairman Bernanke’s every word at the post-meeting press conference for any suggestion the Fed may shift their accommodative policies later this year.
With labor markets in distress, inflation below target, and the economy showing signs of stumbling, their will be less talk of an early reduction in monetary accommodation and possibly some nuanced mention of possible additional stimulus later this year.
This would be bullish news for gold . . . and could give the market enough juice to break through overhead resistance.
Technically Speaking
A significant upside gold-price reaction to this week’s news from the Fed and the ECB just might be enough to fuel an upside price advance and restore upside momentum.
Momentum and technically driven trading in futures and over-the-counter derivative markets were responsible for the swiftness and magnitude of selling as gold prices came tumbling down. Although gold certainly remains vulnerable to renewed technically inspired selling — especially if prices stall below recent highs — the potential for high-powered moves on the upside should not be overlooked.
If gold prices can break through key resistance points and post further significant gains in the days ahead, the machines will turn increasingly bullish — and they have the buying power to drive prices much higher in a blink of the eye.
