Both the BoE and the ECB opted to hold steady on rates today at 5.0% and 4.25%, respectively. These non-moves were widely anticipated and the Fed is expected to follow suit in a couple of weeks.

There was no statement after the BoE's announcement, but one can imagine that the MPC had to reconcile still considerable upside price risks with strong indications that growth in the UK is slowing rapidly. Cable firmed modestly in response, but sterling remains technically weak in the wake of recent sharp losses. The minutes will be released on 17-Sep, so we'll get to see what the MPC was thinking just a day after the Fed announces their policy decision.

The ECB's press conference is just beginning as I write this, but I think they too were faced with simultaneous price risks and growth risks. Look for emphasis to remain on price stability, the ECB's single mandate. There had been some pressure in recent weeks for the central bank to reverse the 25bp hike seen in July. I don't think there was ever a chance of that actually happening. There was some short covering in euro seen in advance of the press conference.

In his opening statement ECB President Trichet did in fact state that risks to price stability remain on the upside. He said that, "Inflation rates are likely to remain well above levels consistent with price stability for a protracted period and upside risks to price stability over the medium term prevail."

Perhaps Mr. Trichet believes that inflation risks will prevail in the medium term because of money supply growth. His very next comment ended with the following rather candid statement, "the still strong underlying pace of monetary expansion points to continued upside risks to price stability over the medium term."

Mr. Trichet has stated that the ECB has no bias. However, expectations that inflation is going to remain a significant problem in the Eurozone for a "protracted period" goes a long way toward confirming that the ECB will keep rates steady for the remainder of the year, and quite likely into Q1-09.

This should offer some support for the euro. While there may be some technical selling interest on upticks, yesterday's low at 1.4385 provides a good intervening barrier ahead of the Dec-07/Jan-08 lows at 1.4366/10. Given the rather oversold posture of both euro and sterling, look for upside momentum in the dollar to wane.

A short-term rebound in the EUR-USD rate above 1.4598/1.4600 would ease pressure on the downside, favoring a return to the consolidation zone centered on 1.4700. The latter currently corresponds closely with the 20-day moving average. A strengthening of the euro (weakening of the dollar) of this magnitude would allow gold to recover and challenge resistance at 845/850.

Yesterday's report highlighted the fact that the dollar rally was more a result of flight out of euros and sterling, rather than any fundamentally compelling reason to own the greenback. With the Fed widely expected to hold rates steady at 2.0% through the end of the year, interest rates differentials will continue to favor both euro and sterling by a rather wide margin.

However, a shift in the bullish dollar sentiment is needed to halt the dollar's rise. Perhaps a pause in the dollar rally will allow the market the opportunity to reexamine the fundamentals and adjust its sentiment accordingly. At that point, the sentiment for the yellow metal is likely to improve as well.

Very strong physical demand out of India may buoy the gold market long enough for that change in sentiment to occur. The 12-day Ganesh festival is now underway. Over the next couple of months, Indians will celebrate Durga Puja and Diwali as well. Gold purchases are believed to be auspicious during these festivals.

The month of October also marks the beginning of the main Indian marriage seasons. Parents traditionally give golden gifts to their daughters for both investment and adornment purposes. The wedding season extends into February.

A UBS report from earlier in the week noted that their vault staff has been, "as busy as at any time over the past 20 years." The report asserts that physical demand out of India over the past 5-weeks has been 5-10 times greater than the average from last year.

Mike likes to say that paper sales of gold provide physical buying opportunities. Indians, far and away the largest consumers of physical gold in the world, are taking advantage of the current price levels. Maybe you should too.

Gold Market Movers:

US ISM NMI for Aug improved to 50.6, above market expectations, versus 49.5 in Jul.

US initial jobless claims for the week ended 29-Aug +15k to 444k, well above market expectations.

US Q2 productivity revised sharply higher to 4.3%.

US ADP employment survey for Aug falls 33k.

ECB leaves refi rate unchanged at 4.25%.

BoE leaves repo rate unchanged at 5.0%.

German manufacturing orders for Jul -1.7%. The market was looking for a slightly positive number.

Riksbank hikes repo rate by 25bp to 4.75%.

Boston Fed president makes a gloomy forecast

Gold bounces from 2-week low as dollar dips

Gold could gain 10% by Dec on surging demand as central banks freeze, caught between inflation & recession

UK: House prices falling at fastest rate in 25 years