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2024 Macro Outlook: The European Central Bank and the Federal Reserve have different policies, the U.S. dollar may not fall sharply, and the room for gold price growth is limited

2024-01-16

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The U.S. dollar is struggling to find new bullish momentum as the monetary policy divergence between the United States and Europe appears to be growing. The Federal Reserve has signaled it could cut interest rates three times this year, while European Central Bank committee members are pushing back against the idea of any easing in 2024.

Austrian central bank president Robert Holzmann said in an interview on Monday that anyone looking for a rate cut in April "will be deeply disappointed."

Holzman's comments come as European inflation remains high due to rising energy prices. Last month, the euro zone's overall consumer price index rose by 2.9%, compared with an increase of 2.4% in the previous month. Inflation remains well above the European Central Bank's 2% target.

"Unless we see a significant reduction to 2%, we simply cannot make any announcement on a rate cut," Holzman told reporters on the sidelines of the World Economic Forum in Davos, Switzerland.

Although Holzmann is seen as one of the ECB's more hawkish members, his comments were in line with those of ECB President Christine Lagarde.

After the ECB announced its monetary policy in December, Lagarde said the central bank "absolutely should not let down its guard." She also stressed that the ECB did not discuss interest 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 Fed is delaying any rate hikes. The market sees a more than 70% chance of easing in March. Markets expect there may be six interest rate cuts this year, double what the Fed said last month.

Some analysts believe that at first glance, this divergence between the Fed and the European Central Bank should be positive for gold, as it will support a stronger euro against the dollar.

However, some analysts said the ECB was unlikely to maintain its hawkish stance. Craig Erlam, senior market analyst at OANDA, said he does not expect a huge divergence in U.S. and European monetary policy. Relatively weak inflation and slowing economic growth will force central banks to cut interest rates at roughly the same pace this year, he added. "The ECB is pushing back expectations because they are waiting for a last-minute rate cut," he said. "Overall, central banks will not act until they are absolutely confident that they can control inflation and get back to their 2% target."

Erlam said that while both the European Central Bank and the Federal Reserve may hope to cut interest rates in June, expectations and reality are often at odds. "With interest rates so constrained, the Fed can't wait for inflation to fall to 2%," Erlam said. "If they wait too long, It could force them to cut spending more deeply later in the year, which I don't think they want to do. A rate cut in March would give them time for orderly easing. The Fed wants to cut rates steadily to show markets they are in full control among.”

At the same time, Erlam pointed out that the Fed also has the ability to cut interest rates more than three times without overstimulating the economy. "Interest rates are so tightly constrained that even if they cut interest rates more than three times, interest rates will still be in the neutral zone."

While the Federal Reserve is likely to cut interest rates more than the European Central Bank this year, Erlam said he does not expect this to lead to significant dollar weakness, providing little new momentum for gold.

"I think gold prices are up or down at the moment because momentum seems to be stalling," he said. "How much price has the market priced in following last year's rise in gold prices? The question is, has gold reached its near-term potential?"

While gold has held on to key support above $2,000 an ounce, its gains have been limited to around $2,050 an ounce at the start of the new year.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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2024 Macro Outlook: The European Central Bank and the Federal Reserve have different policies, the U.S. dollar may not fall sharply, and the room for gold price growth is limited

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