Gold Price Analysis: XAU/USD at risk as Fed announces no SLR exemption

Having struggled to hold above their 21-day moving average, which currently resides at $1741, spot gold prices (XAU/USD) have slipped back from European morning session highs and, as US trade gets underway, are trading flat on the session in the mid-$1730s, pretty much bang in the middle of this week’s $1720-$1755ish price range.

Driving the day

During Asia Pacific and early European session trading hours, precious metals markets had been deriving modest support from a gradual retracement lower in US government bond yields, which had (for example) seen the US 10-year drop back below the 1.70% level. However, the Fed just came out with an announcement that it will not be extending a pandemic-crisis rule which had exempted US bank holdings of US government bonds and deposits from capital reserve requirements. In other words, all of the treasuries and deposits being held by US banks will be subject to the usual reserve requirement rules when the exemptions expire at the end of the month.

This has sent US government bond yields higher again and the 10-year is now trading at close to 1.73% and is again flat on the day. The news has also supported the US dollar and seemed to be the catalyst needed to send the Dollar Index (DXY) back above the 92.00 level, and also seems to have dealt a blow to equity markets, with the S&P 500 opening in the red, now down by about 0.5%.

Powell had been quizzed on whether the Fed would extend this pandemic-crisis rule (the so-called supplementary leverage ratio, or SLR) at the post-FOMC press conference earlier in the week but avoided the question and just said an announcement would come soon. Market commentators are speculating that he had perhaps wanted to avoid saying anything that might come across as hawkish during the meeting. Well, that hawkish reaction is now being seen across markets, as pointed out above.

Should the downside in stocks and upside in US bond yields and USD extends this will of course not bode well for precious metals, which are negatively correlated to bond yields and the buck. Spot gold traders are likely to eye a move back to weekly lows in the $1720s. A break below this would open the door to a move towards last Friday’s $1700ish lows.