During Thursday’s press conference, Draghi sounded more hawkish than usual. What does this imply for the gold market?
As we wrote on Friday, Draghi adopted a more optimistic tone during the press conference. First of all, he provided more upbeat economic projections and praised the improvement in the labor market, the decrease in cross-country heterogeneity, and the significant progress on the inflation front. He even argues that “risks of deflation have largely disappeared”, what was probably the most important phrase of the press conference. Moreover, Draghi said that the risks had diminished (“the balance of risk has improved certainly as far as growth is concerned”).
In consequence, the ECB President removed from his previous introductory statement that sentence: “If warranted, to achieve its objective the Governing Council will act by using all the instruments available within its mandate”. It’s a hawkish change, which reflects the ECB’s confidence in the progress of the Eurozone’s economy. Indeed, the sentiment among members of the Governing Council had definitely improved, because there was no discussion about having another TLTRO after the expiration of the current one.
And Draghi also downplayed the rising spreads among the member countries (we discussed them last week), saying: “there are tensions but not anything that is that serious” and assuring that the euro “is irrevocable”.
The take-home message is that the ECB remained dovish in March, but it prepared the ground for some changes in the forward guidance in the coming months. A more optimistic economic outlook and more hawkish comments from Draghi imply that the ECB may start removing accommodation once the political risks in the Eurozone wane later that year. A more hawkish ECB should be positive for the gold market due to a weaker greenback against the euro, but investors should remember that the eventual tightening would be a very, very gradual process. Therefore, the divergence between the monetary policies of the Fed and the ECB, which supports the yellow metal, should remain for a while or even widen if the U.S. central bank hikes interest rates this week.
