Gold prices have eased from their recent highs as risk aversion abated and the Bank of England (BoE) and Fed, provided a more hawkish tone that expected. The tone helped lift the U.S. dollar paving the way for lower gold prices. Additionally, softer than expected inflation, in the U.S. and Europe are making providing headwinds for gold prices.
Macron Wins Majority in Parliament
The Macron victory for Presidency in France was followed up by a large majority win in the French parliament. Macron’s En Marche movement managed secured 308 of the 577 seats in the second round of the French legislative elections, which means the President has an absolute majority even without the help of his allies the Mouvement Democrate, which managed to secure another 42 seats.
Gold had benefited from the chaos that was the anti-EU forces, but French political victory helped mute volatility. Despite the victory it appears that voter turnout was low, which means there were many that were unsure and just decided to stay home. Riskier assets gained traction in the wake of this win, pushing stocks higher, and driving French yields lower. Gold and gold cfds need another geo-political event, so the focus will now move to the Brexit negotiations.
Economic development, such as weaker than expected data in the U.S. in the form of the recent retail sales and CPI, only gave gold prices a temporary lift. The Fed and BoE shut the door on speculation that either bank might hold off on a hawkish tone.
Bank of England has 3-Descents
Last week, the BoE left rates unchanged, but still managed to stun market participants. A cautious tone was expected by market participants, ahead of the Brexit negotiations, and in the wake of a hung parliament. To the surprise of many the meeting revealed a more hawkish tone. The vote to keep rates unchanged was 5-3, was concerning to many, and helped buoy sterling. Higher rates generally have a negative effect on gold prices.
The vote means that three officials are now calling for a rate hike. The decision to move forward with the same level of bond purchases in the corporate sector which is financed by bond issuances that is approximately 10 billion in pounds, was passed through without a hitch. This shows that the central bank will likely deal with quantitative easing after its begins to tighten interest rates. In their statement, the BoE added a reference to growth in the Q1, stating that it was slow, which reflects declining consumer spending. At the same time, the BoE sees improving export indicators in the light of a weaker currency.
The hawkish tone of the BoE was surpassed by the Fed’s actions and statement. The Fed increased rates by 25-basis points, with 1-descent. What somewhat surprised the markets was that the forecast, known as the Fed’s dot plots, continued to show that Fed officials see another 2 rate hikes during the balance of 2017. This comes despite recent weaker than expected data, which means that the Fed is on a course to normalize and will need much worse than expected data to halt their path.