Silver Prices Forecast: Hawkish Fed Outlook May Trigger Steep Sell-off

Federal Reserve Decision: A Dual-Edged Sword for Silver Prices

Silver prices held steady in a limited range on Wednesday, as the market braced for the U.S. Federal Reserve’s policy announcement and Fed Chair Jerome Powell’s remarks. The anticipation revolves around how the Fed’s stance, hawkish or dovish, could sway silver prices. The Federal Open Market Committee (FOMC) is set to release its policy statement at 18:00 GMT, followed by Powell’s press conference half an hour later.

At 10:40 GMT, XAG/USD is trading $24.85, down $0.06 or -0.26%.

While the U.S. central bank is likely to keep rates unchanged, the spotlight is on its economic outlook and rate projections for the rest of the year. A key aspect affecting silver prices is whether the Fed adopts a hawkish or dovish tone.

Hawkish Fed Scenario: If the Fed signals fewer rate cuts than the market expects, this could be interpreted as a hawkish stance. In such a scenario, where the median dot plot shows a reduction in anticipated rate cuts – possibly from three to one or two – silver prices could experience volatility. A hawkish Fed might lead to a surge in the U.S. dollar, making silver more expensive for holders of other currencies. This could result in a downward pressure on silver prices, potentially pushing them to levels between $23.885 and $23.51.

Dovish Fed Scenario: Conversely, a dovish Fed, indicating a willingness for more aggressive rate cuts, could bolster silver prices. Lower interest rates decrease the opportunity cost of holding non-yielding bullion like silver, making it a more attractive investment. In this event, silver could see an upward movement, supported by the broader rise in commodities and the appeal of silver as a hedge against potential inflationary pressures.

Recent economic indicators, such as the Consumer Price Index (CPI) and the Producer Price Index (PPI), have shown higher inflation than expected, complicating the Fed’s rate decision. With a 2.3% rise in energy costs inflating the CPI and a significant increase in the PPI, driven mainly by a jump in energy prices, the inflation outlook remains a critical factor in the Fed’s decision-making process.

As market participants await Powell’s insights, they remain attuned to the delicate balance of economic indicators and the Fed’s interpretation of these signals. The ensuing decision by the Fed will not only impact immediate silver prices but could also set the tone for market expectations in the foreseeable future.

Technical Analysis

Like XAU/USD, Silver (XAG/USD) is in an uptrend, but vulnerable to a near-term correction of the rally from February 28 ($22.28) to March 15 ($25.49. This makes its 50% to 61.8% retracement zone at $23.885 to $23.51 a potential downside target. The major support is the 50-day moving average at $23.21 and the 200-day moving average at $23.33.

On the upside, a trade through $25.45 will signal a resumption of the uptrend, putting the December 4 main top at $25.91 on the radar.