On Thursday, the ECB held its monetary policy meeting and the press conference. How may the ECB’s last decisions impact the global economy and the gold market?

The ECB left its interest rates unchanged, in line with expectations. There were, however, some unexpected moves. First, the President of the ECB Mario Draghi was very dovish as he reaffirmed that the ECB is ready to extend QE beyond next year if necessary. He also said winking significantly that “the asset purchase program provides sufficient flexibility in terms of adjusting the size, composition and duration of the program”. Second, although the ECB did not boost the quantitative easing, it increased the amount of monetizable assets, i.e. the issue share limit for QE (which is the amount of any one issue the ECB can buy) from 25 to 33 percent. Oh, financial markets must love Mr. Draghi, as stocks surged after the press conference. Third, the ECB lowered again its forecasts for inflation and economic growth, due to the slowdown in the emerging market economies (China is now the EU's second trading partner and the EU is China's biggest trading partner) and the decline in oil prices. The ECB expects inflation at 1.1 percent next year, below its previous forecast of 1.5 percent, and sees GDP growth in 2016 at 1.7 percent versus its June forecast of 1.9 percent. Therefore, it is possible that the ECB will boost its quantitative easing program in the nearest future as the economic outlook deteriorated and the ECB changed its rules only after six months. By the way, Draghi said that “these purchases have a favorable impact on the cost and availability of credit for firms and households”, which is a bit funny, given the fact that monetary policy affects the real economy with a significant lag, rather longer than half a year.

The main takeaway is that the recent actions of the ECB and Draghi's comments were dovish, so they boosted European stock markets and pushed the euro lower against the U.S. dollar. The stronger greenback will be a headwind for gold, and so would be the bolstered stock market if an expansion of the QE actually happens. On the other hand, with the more dovish ECB, the Fed’s hike in September looks much less probable – and this should be positive news for the gold market.

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Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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