Sluggish Growth In Eurozone And Gold

Eurozone growth will be slower than expected in 2016. What does it mean for the gold market?

On Tuesday, the European Commission cut the forecast for GDP growth in the Eurozone this year, despite surprisingly strong growth in the first quarter. The economy of the 19 countries sharing the euro is expected to rise just 1.6 percent in 2016, down from 1.7 percent in 2015 and 0.1 point less than the February forecast.

Moreover, Eurozone retail sales fell sharply in March, according to estimates from Eurostat, the statistical office of the EU, published yesterday. The seasonally adjusted volume of retail trade fell 0.5 percent compared with February 2016. Sales dropped for the first time since October 2015. The decline may indicate that a boost from lower energy prices has already waned. Disappointing retail sales are likely to raise the risk that Eurozone growth this year will be even slower than forecasted by the European Commission.

Additionally, the inflation forecast for 2016 in the Eurozone was revised downward to 0.2 percent from 0.5 percent expected in February. The lack of rise in prices combined with weak economic growth despite the ECB’s easy monetary policy indicates that the ECB’s actions are ineffective. This fact may increase some safe-haven demand for the yellow metal, however, sluggish economic growth and stubbornly low inflation increase the odds of a new expansionary stimulus provided by the European Central Bank. It goes without saying that it is bad news for the gold market. The ECB’s more aggressive actions would translate into a weaker euro and a stronger greenback, which is a negative scenario for the shiny metal. The recent jump in the price of gold above $1,300 was to a large extent a reflection of weakness in the U.S. dollar, partially caused by the recent BoJ and ECB's inaction.

To sum up, the Eurozone economic recovery remains modest. Weak economic data from the Europe is likely to push the common currency down. As the euro is often positively correlated with gold (as the major alternatives for the U.S. dollar), it is bad news for bullion. Gold investors should remember that the euro exchange rate against the greenback could be additionally under pressure this year due to the fears about Brexit, renewed worries over Greece’s future, and the upcoming Spanish general election.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.