(Kitco News) - The euro could find some decent momentum against the U.S. dollar on Thursday as the European Central Bank is not expected to loosen its monetary policy, said analysts; however, a weaker green back might not have a significant impact on gold prices.
Analysts do admit that expectations have been building for the ECB to do something to help boost inflation but it is still too early in to see any significant action.
On Monday, Eurostats reported that annual consumer inflation fell to 0.5% in March, a drop from February’s reading of 0.7% and the lowest level since November 2009.
Simon Derrick, chief currency strategist from Bank of New York Mellon, said despite the risk of rising disinflation, recent comments from ECB members are an indication that the central bank is “not rushing to do anything right now.”
With the ECB not ready to act, Derrick said that EUR/USD could break above $1.40, a recently strong resistance area, and could even build enough momentum to hit $1.50 within a few months.
Although the move would lead to a relatively weaker U.S. dollar, which is historically positive for gold prices, Derrick said he thinks it is unlikely a strong euro will create any long-term momentum in the yellow metal.
Derrick added the drop in the U.S. dollar would have more impact on gold if the move wasn’t based on a strong euro currency.
“This is not about U.S. dollar weakness,” he said. “The U.S. dollar is kind of neutral in this market so I don’t think it will have much impact on gold prices.”
Marc Chandler, global head of currency strategy from Brown Brothers Harriman, agreed with the outlook that the ECB will not loosen its monetary policy, and despite a stronger euro, gold prices should not be impacted.
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Although the drop in inflation in March was significant, Chandler said that the calculations could be the result of significant seasonal distortions. He added that the ECB might just sit on the data and wait for a clearer picture to emerge.
“This could be the low point in inflation and I think the ECB will want to wait and see what happens,” he said.
Chandler added that with the ECB standing pat, he is also expecting the euro to break above $1.40 against the U.S. dollar and could eventually hit $1.4250 in the near-term. Although he wouldn’t rule out a push towards $1.50, he added that central bank would probably act before it the currency reached that level.
Looking at the impact on the gold market, Chandler said that although gold has had a strong correlation with the euro, it has been dropping steadily over the last few months. He pointed out that current correlation is at about 37% when last year it was hovering around 50%.
Bart Melek, head of commodity strategy at TD Securities, said that he is not ruling out ECB President Mario Draghi announcing some form of quantitative easing or at least providing some stronger forward guidance as inflation has dropped dangerously low.
Analysts have pointed out that the central bank could loosen its monetary policy if it stopped absorbing the liquidity - also referred to as sterilizing - of its Securities Markets Program, which was used to purchase government bonds. Sterilizing the bond purchases neutralizes their impact on the money supply and lowers the risk of inflation.
Melek added that a weaker euro could have a stronger impact on the gold market, dragging prices lower, than a stronger euro would in boosting prices.
“I think the gold market wants to go lower ahead of Friday’s employment report,” he said. “That is why there is less upside potential.”
By Neils Christensen of Kitco News; nchristensen@kitco.com
