Silver Prices Forecast: CPI, Fed Decisions Could Fuel Volatile Reaction

Cooling Inflation and Its Impact on Silver Prices

Forecasters predict that the upcoming inflation report will reveal a subdued increase in consumer prices for May, the smallest since October. This could signal a significant shift for silver traders, as inflation trends and Federal Reserve actions are closely monitored indicators in the commodities market.

At 11:23 GMT, XAG/USD is trading $29.40, up $0.12 or +0.39%.

May Inflation Report Expectations

The Bureau of Labor Statistics is set to release the Consumer Price Index (CPI) report on Wednesday at 12:30 GMT. Analysts expect a mere 0.1% month-over-month increase in May, down from 0.3% in April. If accurate, this would reflect an annual rise of 3.4%. Core CPI, excluding food and energy, is anticipated to show a 0.3% monthly increase and a 3.5% annual rate. These figures, although modestly lower than previous months, still hover above the Federal Reserve’s 2% target.

Impact of Falling Gasoline Prices

A significant contributor to the lower inflation rate is the drop in gasoline prices, which fell by approximately 18 cents per gallon to an average of $3.61 in May. This decline in energy costs has provided considerable relief to consumers and is expected to reduce the headline CPI. Bank of America Securities economists highlighted that continued declines in crude prices could further suppress gas prices, maintaining downward pressure on overall inflation.

Federal Reserve’s Stance on Interest Rates

Despite the cooling inflation, the Federal Reserve is unlikely to immediately cut interest rates based on May’s data alone. However, a continued trend of subdued inflation could bolster the case for a rate cut later in the year. The Fed has kept its key interest rate at a 23-year high since last July to combat persistent inflation. Any future rate cuts will be contingent on consistent economic data supporting a return to the 2% inflation target.

If the Federal Reserve decides to pass on rate cuts in September, November, and December, it could put downward pressure on silver prices in the short term. High interest rates tend to strengthen the US dollar, making silver more expensive for foreign investors and reducing its appeal as a safe-haven asset.

Core Inflation Under Scrutiny

Core inflation remains a critical focus for the Federal Reserve due to its exclusion of the more volatile food and energy prices. The forecast suggests a slight dip in core inflation to a 3.5% annual rate from 3.6% in April. However, certain categories like used cars may see notable price increases, indicating mixed signals within the core metrics.

Market Forecast: Bullish Outlook for Silver

Given the current economic indicators and the potential for continued cooling inflation, the short-term outlook for silver appears bullish. Lower inflation and the possibility of interest rate cuts later in the year could boost demand for silver as a hedge against inflation and economic uncertainty. Technically, the market faces downside risks if the 50-day moving average fails as support.

If the Federal Reserve announces the possibility of two rate cuts in 2024, it could significantly support silver prices by weakening the dollar and lowering borrowing costs, making silver a more attractive investment. Traders should monitor upcoming economic reports closely, as sustained lower inflation could lead to a favorable environment for silver prices.

Technical Analysis

The short-term trend is down on the daily chart, but despite recent plunges in silver and gold, XAU/USD is still holding above the 50-day moving average at $28.88.

While we could see a technical bounce on the first test of this moving average, breaking it could trigger a large number of sell stops, which could drive prices all the way down to the May 2 bottom at $26.02 over the near-term.

If the market is bullish, the upside will take care of itself, if it turns bearish then the downside could be unforgiving.