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The growing threat of inflation prompted the European Central Bank to surprise markets by raising interest rates by 50 basis points, giving the euro new momentum against the US dollar and, in turn, pushing gold prices above $1,700 an ounce.
Alongside rising price pressures, ECB President Christine Lagarde also noted rising economic risks. But at the same time, added that according to the central bank: the European economy will not fall into recession.
Even as the European economy faces mounting downside risks, the ECB sees inflation as the biggest threat on the horizon.
While the ECB expects to continue raising interest rates for the remainder of the year, markets see little tightening signals.
Lagarde said the central bank would not be making any rate hike predictions, adding that she did not know where the neutral rate would be.
Along with raising interest rates, the ECB also approved a new policy instrument—the Transmission Protection Instrument (TPI).
Although the TPI was launched to mitigate the risks of fragmentation in the euro area, markets have not received much information on its implementation.
According to some market analysts, the ECB's aggressive move should help improve sentiment in the gold market as the US dollar's gains may be limited.
The US dollar is in an unstoppable rally, recently reaching a 20-year high and approaching parity with the euro. Analysts say the US dollar's decline is partly due to a big difference in monetary policy between the Federal Reserve and the ECB.
This is the first time the ECB has raised interest rates in more than a decade. At the same time, the Federal Reserve has already raised interest rates three times this year, raising the federal funds rate to a target level of 1.50% to 1.75%.
Looking ahead, some analysts see limited scope for the euro as the interest rate gap remains particularly wide.
According to currency analysts at TD Securities: in the near future, the euro will face resistance between 1.02807 and 1.03485 against the US dollar.Given that the euro is expected to be limited, gold prices may continue to decline.
The Federal Reserve is expected to raise interest rates by another 75 basis points later this month.
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