The European Central Bank adopted a new inflation target of 2% over the medium term in a symmetric manner, meaning they will view undershooting and overshooting inflation equally. This is a dovish shift that could support gold as an inflation hedge. However, the ECB may be less aggressive than the Fed and a stronger dollar could limit gold's gains. The ECB also emphasized addressing climate change and will only purchase green assets going forward. Gold has been range-bound as markets await clues from upcoming Fed Chair testimony, but lower yields and a dovish ECB provide fundamental support.

1. ECB Changed Monetary
Strategy:
Will It Alter Gold’s Course

2. Points To Be Discussed Today:
• ECB Adopts A New Inflation Target
• HICP Represent Inflation Rate
• Implications For Gold
• Gold Is Catching Its Breath
• Gold Technical & Fundamental Overview

3. ECB Adopts A New Inflation Target
• The ECB adopts a new inflation target. Is the European Central Bank
mimicking the Fed or doing its own thing? The revolution in central
banking is spreading.
• Following the Fed, the European Central Bank has also modified
its target. Last week, after an 18-months review of its monetary
policy framework, the ECB published a statement on its monetary
policy strategy, deciding to change its goal from “below but close to
2%” to a more symmetric aim of “2% inflation over the medium term”.
The most important part of the statement is below:
• The Governing Council considers that price stability is best
maintained by aiming for two per cent inflation over the medium
term. The Governing Council’s commitment to this target is
symmetric.

4. Symmetry
• The symmetry means that the ECB considers both overshooting and
undershooting as equally bad.
• In the previous framework, the ECB clearly believed that downside
deviations from inflation were less harmful than upside deviations.
• The medium-term orientation means that the ECB accepts short-
term deviations of inflation from the target, and acknowledges lags
and uncertainty in the application of the monetary policy to the
economy and to inflation.
• In particular, the ECB stated that there might be transitory periods in
which inflation is moderately above target. However, similarly to Fed,
neither “medium-term” nor “moderately” were defined more
specifically.

5. HICP Represent Inflation Rate
• Another interesting point in the statement is the recognition that
“the inclusion of the costs related to owner-occupied housing in
the HICP would better represent the inflation rate that is
relevant for households”.
• So far, the ECB only covers costs of rents in the case of
tenants.
• It doesn’t mean that the ECB will start including house prices in
its measures of consumer inflation, but it’s a move toward more
accurate measures that will better show true inflationary forces
operating within the economy.

6. ECB Emphasized The Importance Of Climate
Change For Price Stability
• Last but definitely not least, the ECB emphasized the importance of climate
change for price stability, monetary policy, and central banking:
• Climate change has profound implications for price stability through its impact
on the structure and cyclical dynamics of the economy and the financial system.
• Addressing climate change is a global challenge and a policy priority for the EU.
• Within its mandate, the Governing Council is committed to ensuring that the
Euro system fully takes into account, in line with the EU’s climate goals and
objectives, the implications of climate change and the carbon transition for
monetary policy and central banking.
• Accordingly, the Governing Council has committed to an ambitious climate-
related action plan. In addition to the comprehensive incorporation of climate
factors in its monetary policy assessments, the Governing Council will adapt the
design of its monetary policy operational framework in relation to disclosures,
risk assessment, corporate sector asset purchases and the collateral
framework.

7. ECB’s Ambitious Climate-Related Action Plan
• The ECB’s ambitious climate-related action plan was announced
during a separate press conference.
• The blueprint includes broader macroeconomic modelling,
developing new indicators, conducting climate stress tests, etc. In
particular, in the future, the ECB will be purchasing only adequately
green assets:
• The ECB will adjust the framework guiding the allocation of
corporate bond purchases to incorporate climate change criteria, in
line with its mandate.
• These will include the alignment of issuers with, at a minimum, EU
legislation implementing the Paris agreement through climate
change-related metrics or commitments of the issuers to such goals.

8. ECB’s Ambitious Climate-Related Action Plan - I
• It doesn’t make any sense, of course. After all, as John
Cohrane pointed out, “climate change poses no measurable risk to
the financial system”.
• This is because the climate is not likely to cause a sudden,
unexpected and enormous economic effect that could endanger the
financial system.
• Climate is not weather – and even sudden natural disasters barely
affect the financial system.
• Central banks should focus on price stability and not engage in
achieving social or political goals.
• The deviations from their traditional narrow mission could only
destroy their independence and, thus, their ability to hold inflation
under control and prevent big financial crashes.

9. Implications For Gold
• The ECB’s change is dovish, as it shows that the
European central bankers are now more eager to
tolerate an overshoot.
• It means that both the Fed and the ECB started to
be more tolerant of overshoot exactly when
inflation became higher.
• What a coincidence! The HCIP for the Eurozone
is presented in the chart below.

10. HCPI For Eurozone

11. Inflation Hedge
• So, the alteration could be seen as fundamentally positive
for inflation hedges such as gold.
• However, the ECB could be less aggressive than the Fed.
As Christine Lagarde said during the press conference, “Are we
doing average inflation-targeting like the Fed? The answer is no,
very squarely”.
• On the other hand, a more dovish ECB should translate into a
stronger dollar relative to both the euro and gold.
• But it’s also possible that the change in the monetary framework
won’t significantly affect the precious metals, as the ECB is already
ultra-dovish and has problems with even reaching the target, not to
mention overshooting it.

12. Gold Is Catching Its Breath
• It seems that gold is reacting now more to the
decrease in the bond yields rather than to the
changes in the US or EU monetary policies.
• As long as the interest rates are declining, gold is
catching its breath. But this decrease may be
temporary, so better watch out! Powell’s testimonies to
Congress next week could provide us with more clues
about gold’s outlook.

13. Gold Technical Overview

14. Gold Technical Overview - I
• From a technical perspective, the commodity has been oscillating in a range
over the past one week or so.
• This further makes it prudent to wait for a sustained break through the
mentioned trading range before positioning for any meaningful appreciating
move in the near term.
• Investors might refrain from place aggressive bets ahead of Fed Chair Jerome
Powell's congressional testimony on Wednesday and Thursday, which will be
closely watched for his response to the inflation figures.
• This, in turn, will play a key role in determining the next leg of a directional
move for the non-yielding gold.

15. Gold Fundamental Overview
• Meanwhile, the data further fueled market speculations that the Fed is moving
towards tightening its monetary policy stance sooner than anticipated.
• It is worth recalling that the June FOMC meeting minutes released last
Wednesday revealed that Fed officials agreed on the need to be ready to act if
inflation or other risks materialize.
• This, in turn, provided a goodish lift to the US dollar and might keep a lid on
any runaway rally for dollar-denominated commodities, including gold.

16. Gold Fundamental Overview - I

17. This Week In XAU/USD: Lower US Yields Are Not Enough
• US bond yields have plunged in the past week, perplexing many investors and
supporting gold prices.
• Some explain the increase by pointing to fears of the Delta covid variant that would
knock down the recovery, at least temporarily.
• Others point to a short-lived pause in the issuance of new bonds.
• Lower returns on safe US debt make the yield less precious metal more attractive,
yet the correlation between both asset classes – as well as that with the dollar –
has eroded.
• When yields finally advanced late in the week, XAU/USD received a small boost.

18. This Week In XAU/USD: Lower US Yields Are Not
Enough - I
• Regulatory impact also seemed to be minimal. Basel III rules were introduced
in some jurisdictions, and they reclassify what paper gold means for banks'
balance sheets.
• Financial institutions may only count physical bars and coins as top-tier
collateral, while indirect holdings were downgraded.
• There are two solutions – either ditching such indirect holdings and pushing
prices lower or swapping them for the real thing, boosting the value of the
yellow metal.
• After over a week, it seems that there has been no adverse effect on gold
prices, leaving other factors to influence XAU/USD price

19. Gold News & Analysis
• Gold remains firm around $1810 mark despite the DXY rebound.
• All eyes remain on the US inflation data, Fed Powell’s speech.
• XAU/USD bulls bet on Golden Cross pattern, uptrend support, lower
yields.
• Gold faded an early North American session bullish spike and
refreshed daily lows in the last hour, with bears now eyeing a
sustained break below the $1,800 mark.
• Gold, which is often considered as a hedge against inflation,
benefitted from an unexpected rise in the US consumer price data.
• Source:
• Gold Forecast, News and Analysis - FXStreet

20. ECB Changed Monetary
Strategy:
Will It Alter Gold’s Course

21. THANKS FOR LISTENING
ECB Changed Monetary Strategy:
Will It Alter Gold’s Course