- US GDP growth seen at 2.6% in Q3
- ECB to stick to dovish rhetoric
- How will gold respond to ECB?
- Crude oil prices ease
- Earnings from Apple and Amazon later
After a slow start for the markets, expect to see a bout of volatility from around 13:30 BST. This is when we will have the advance estimate of third quarter US GDP released, while the European Central Bank’s press conference will also get underway. The EUR/USD will be in sharp focus.
US GDP eyed
The world’s largest economy is expected to have grown by 2.6% in Q3 on an annualised basis, a sharp slow down from 6.7% growth in Q2. If the data turns out to be stronger, then expect to see some dollar strength.
ECB to stick to dovish rhetoric
In as far as the ECB is concerned, well investors have been buying European stocks and selling the euro in recent weeks leading up to today’s meeting. The single currency’s performance suggest investors are not expecting any action in response to surging inflation. Still, you can’t completely rule out the prospect of the ECB ending the pandemic emergency purchase programme (PEPP) earlier than expected. That said, our base case scenario is that the ECB will stick to its view that rising inflation is only temporary, and Christine Lagarde will likely dismiss talks of an earlier end of PEPP. This is partly because ECB staff’s economic projections will not be out until the December meeting. So, wait-and-see might be the approach at today’s meeting, with Lagarde unlikely to offer much in the way of fresh information. At best, Christine Lagarde may show signs she and her ECB colleagues are worried about rising inflation, which would indicate a policy response in December. If that’s the case, expect the EUR/USD to squeeze some weaker shorts.
How will gold respond to ECB?
Gold initially fell after the Bank of Canada yesterday surprised the markets with a hawkish decision to end QE. The precious metal then quickly recovered as global long-end bond yields resumed lower. Judging by its reaction to the BOC’s decision, a hawkish ECB might trigger a quick drop in prices, but it appears like the market is positioned long. So, any weakness is likely to be short-lived. If the ECB is dovish, this should keep gold supported.
Gold fundamentally supported in the long term
Gold investors are realising that the major central banks as a whole will probably not tighten monetary policy too aggressively even if inflation remains elevated. The rationale is that there’s still much spare capacity in the economy and the impact of temporary factors will wane in the months ahead, causing inflation to cool and reduce the need for central banks to tighten aggressively. In a welcoming sign, crude prices have dropped (see below). Meanwhile higher taxes in the years ahead to pay for the cost of various pandemic stimulus measures by western governments will probably also mean slower economic growth and lower rates of inflation. Thus, any policy tightening that we will see from now on could be very limited. Gold stands to benefit in the long term.
Crude oil prices ease
In a welcoming development for those worried about high levels of inflation, crude and gas prices fell after Iran and the EU agreed to restart nuclear negotiations. If sanctions are eventually lifted, this could ultimately lead to increased supply of oil from Iran to the tune of 1.3 million barrels per day. On top of this, Russian President Putin promised increased gas supplies to Europe, while in China, the government has stepped up its efforts to secure power supplies, a development that cause coal prices to tumble.
