ECB and Fed Policies May Propel Gold's Rise

(Kitco News) - The U.S. dollar is struggling to find new bullish momentum as there seems to be a growing divergence in monetary policies between the U.S. and Europe.

The Federal Reserve has signaled three potential rate cuts this year; meanwhile, committee members from the European Central Bank are pushing back on the idea of any easing in 2024.

In an interview with CNBC on Monday, Robert Holzmann, the governor of Austria’s central bank, said that anyone looking for a rate cut in April “will be deeply disappointed.”

Holzmann’s comments come as inflation in Europe remains stubbornly elevated, boosted by rising energy prices. Last month, the headline eurozone Consumer Price Index rose 2.9% compared to the previous month’s increase of 2.4%. Inflation remains well above the ECB’s target of 2%.

"Unless we see a clear decline towards 2%, we won't be able to make any announcement at all when we're going to cut," Holzmann told CNBC on the sidelines of the World Economic Forum in Davos, Switzerland.

Although Holzmann is seen as one of the more hawkish members of the ECB, his comments align with those of ECB President Christine Lagarde.

Following the ECB’s December monetary policy announcement, Lagarde said the central bank should “absolutely not lower our guard.” She also stressed that the ECB did not discuss rate cuts at all during the meeting.

The ECB’s hawkish stance contrasts with the Federal Reserve, which is expected to cut interest rates later this year. However, the Federal Reserve is pushing back on the timing of interest rates. Markets see a more than 70% chance of easing in March. Markets are pricing six possible  rate cuts this year, double what the central bank indicated last month.

According to some analysts, at first blush, this divide between the Federal Reserve and the ECB should be positive for gold as it would support a stronger euro against the U.S. dollar.

However, some analysts have said that it is unlikely the ECB will be able to maintain its hawkish stance. Craig Erlam, senior market analyst at OANDA, said that he does not expect to see a vast divergence between U.S. and European monetary policy.

He added that relatively weak inflation and slowing economic growth will force central banks to cut rates at roughly the same pace this year.

“The ECB is pushing back on expectations because they are waiting for the very last minute to cut rates,” he said. “Central banks, in general are not going to pivot until they are absolutely confident that they have inflation under control and headed back to their 2% targets.”

Erlam said that while both the ECB and Federal Reserve would probably like to cut rates in June, expectations and reality don’t often agree.

“Because rates are so restrictive, the Federal Reserve can’t wait for inflation to fall to 2%,” Erlam said. “If they wait too long, that might force them to cut more aggressively later in the year and I don’t think they want to do that. A March rate cut would give them the time for orderly easing. The Fed wants to cut rates at a steady pace to show markets that they are in full control.”

At the same time, Erlam noted that the U.S. central bank can also afford to cut rates more than three times without over-stimulating the economy.

“Interest rates are so restrictive that rates will still be in neutral territory even if there are more than three cuts,” he said.

While the Federal Reserve may see more rate cuts than the ECB this year, Erlam said that he doesn’t expect it will lead to material weakness in the U.S. dollar, providing little new momentum for gold.

“I think right now it’s a tossup for gold whether prices go higher or lower as momentum appears to be stalling,” he said. “After gold’s rally last year, how much is priced into the market already? The question is, has gold fulfilled its near-term potential and is now running on fumes?”

While gold prices have held critical support above $2,000 an ounce, gains have been capped near $2,050 an ounce early in the new year.

This article originally appeared on Kitco News