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(Kitco News) - The European Central Bank's shift to a more neutral data-dependent stance is weighing on the euro against the U.S. dollar, which in turn has pushed gold prices to session lows.
The gold market has broken below support at $1,950 an ounce after ECB President Christine Lagarde said that the central bank is no longer in an environment of forward guidance. She added each meeting will be live an depend on the path of incoming economic data.
"We might hike interest rates, or we might hold and what we decide in September is not definitive," she said.
"The lack of commitment to further rate hikes from the ECB today weighed on the euro and saw eurozone yields decline. The single currency plunged against the dollar, slipping back below 1.10," said Craig Erlam, senior European market analyst at OANDA.
The renewed momentum in the U.S. dollar has pushed gold prices to a two-week low. August gold futures last traded at $1,945 an ounce, down 1.27% on the day.
Lagarde's comments come after the ECB increased its three key interest rates by 25 basis points. The interest rate on the main refinancing operations and the interest rates on the marginal lending facility and the deposit facility will be increased to 4.25%, 4.50% and 3.75%, respectively, the central bank said in its statement.
Despite the more nuanced stance on monetary policy, Lagarde said that the central bank's ultimate goal remains in place.
"We are determined to break the back of inflation," she said. "Doing too much is not something we are concerned about. Bringing inflation down to 2% is our objective."
In June, inflation rose 5.5% for the year, down from May's increase of 6.1%. The ECB also noted that energy prices fell, dropping by 5.6%, year-on-year; food price inflation continued to slow but remained high, at 11.6%.
According to some analysts, the ECB's data-dependent approach is more dovish than markets were expecting. Some analysts have said they expected the central bank to lay the groundwork for further rate hikes.
In a note published just after the monetary policy decision and Lagarde's press conference, Naeem Aslam, chief investment officer at Zaye Capital Markets, said that he expects the ECB to raise interest rates by another 75 to 100 basis points before it reaches its terminal rate.
However, he added that a slowing European economy will create some challenges for the central bank in its current tightening cycle.
While the path of future rate hikes from the ECB has become less certain, Lagarde was definitive in her stance that the central bank is not looking to cut interest rates anytime soon.
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In her opening statement, Lagarde noted that while inflation has come down from last year's highs, there are still risks that it will remain stubbornly elevated. At the same time, she added that while economic growth has been resilient in the first half of 2023, uncertainty and risks remain.
"The outlook for economic growth and inflation remains highly uncertain. Downside risks to growth include Russia's unjustified war against Ukraine and an increase in broader geopolitical tensions, which could fragment global trade and thus weigh on the euro area economy. Growth could also be slower if the effects of monetary policy are more forceful than expected, or if the world economy weakens and thereby dampens demand for euro area exports," Lagarde said in her opening remarks.
"Upside risks to inflation include potential renewed upward pressures on the costs of energy and food, also related to Russia's unilateral withdrawal from the Black Sea Grain Initiative. Adverse weather conditions, in light of the unfolding climate crisis, may push up food prices by more than projected. A lasting rise in inflation expectations above our target, or higher than anticipated increases in wages or profit margins, could also drive inflation higher, including over the medium term," she added.
Following the ECB decision and Lagarde's comments, many economists expect that the central bank will raise interest rates one last time in September as it hold's interest rates at an elevated level through the rest of the year.
