Margin Squeeze Triggers Precious Metals Selloff as Central Banks Eye Rate Divergence

Year-end liquidation pressures hit precious metals hard on Monday, with February COMEX gold tumbling 209.10 points (-4.59%) and March COMEX silver crashing 6.736 points (-8.73%), pushing gold to 1.5-week lows. The sharp downturn wasn’t purely driven by fundamental weakness—the CME’s decision to raise margin requirements for precious metals trading sparked a wave of long liquidation that accelerated losses as the session progressed.

Rate Divergence: The Hidden Driver Behind Currency and Commodity Moves

The broader catalyst for Monday’s market action stems from diverging monetary policy expectations across major central banks. The FOMC is anticipated to cut rates approximately 50 basis points in 2026, while the Bank of Japan signals further tightening with potential +25 bp increases, and the ECB is expected to maintain its current stance. This policy disparity is reshaping currency valuations and, by extension, commodity prices denominated in dollars.

The December 19 BOJ meeting summary released Monday revealed that policymakers believe Japan’s real interest rate remains abnormally depressed, signaling the likelihood of additional rate hikes. For context, this gap is substantial—consider that 26 million yen to USD conversions have become more favorable for dollar holders amid these rate expectations, yet the yen still strengthened against the greenback on Monday as markets repriced rate-hike probabilities.

Dollar Holds Ground Despite Deeper Structural Headwinds

The dollar index (DXY) edged up 0.02% on Monday, finding temporary support from stock market weakness that boosted safe-haven dollar demand. The stronger-than-expected November pending home sales report—which rose 3.3% m/m versus expectations of 0.9% m/m—also provided a brief lift. However, this support proved fragile after the December Dallas Fed manufacturing outlook showed general business activity unexpectedly deteriorated to -10.9 from -6.0, prompting the dollar to retreat from intraday highs.

Underlying dollar weakness persists as the Fed continues its liquidity operations, having initiated $40 billion monthly purchases of Treasury bills since mid-December. More significantly, market expectations of a dovish Fed Chair appointment—likely to be National Economic Council Director Kevin Hassett, viewed as the most accommodative candidate—are weighing on dollar sentiment. President Trump signaled he’ll unveil his Fed Chair selection in early 2026, adding uncertainty to longer-term rate expectations. The markets are pricing just 16% odds of a -25 bp rate cut at the January 27-28 FOMC meeting.

EUR/USD and USD/JPY: Currency Pairs Reacting to Policy Divergence

EUR/USD declined 0.03% on Monday as the euro absorbed pressure from stalled Russian-Ukrainian peace talks over the weekend. Additionally, declining Eurozone sovereign bond yields—with the 10-year German bund yield slipping to a 3-week low of 2.824%—are eroding the euro’s interest rate advantage. Swap markets now price zero probability of a +25 bp ECB rate hike at the February 5 policy decision.

USD/JPY fell 0.35%, with the yen rallying as the BOJ meeting summary reinforced expectations for continued policy normalization. Lower US Treasury yields also supported yen strength on the session.

Precious Metals: Support and Headwinds in Flux

While margin pressures triggered immediate selling, underlying bullish factors remain intact for gold and silver. Central banks continue accumulating precious metals—China’s PBOC added 30,000 ounces in November, bringing reserves to 74.1 million troy ounces, marking the thirteenth consecutive month of accumulation. Globally, central banks purchased 220 metric tons of gold in Q3, up 28% from the previous quarter.

Fund participation also remains robust. Gold ETF long holdings climbed to a 3.25-year high last Friday, while silver ETF long positions reached a 3.5-year high the prior Tuesday, indicating investor conviction despite Monday’s liquidation wave.

Geopolitical risks continue to anchor safe-haven demand. Ongoing tensions surrounding US tariffs, the Ukraine conflict, Middle East instability, and Venezuelan oil sanction enforcement—including recent US military operations against ISIS targets in Nigeria—all support precious metals as diversification hedges. The FOMC’s December 10 announcement of liquidity injections also remains a tailwind for assets traditionally sensitive to money supply expectations.