Silver Prices Forecast: XAG/USD’s Upside Limited by Fed Tightening, US Dollar Strength

Highlights

• Fed’s hawkish stance caps silver’s gains.
• Dollar strength and high yields offset silver’s recent advances.
• Elevated rates to persist, dampening silver allure.
• XAG/USD’s charm fades amid rising Treasury yields competition.

Dynamics of Silver in a Strong Dollar Environment

Silver’s (XAG/USD) performance on Thursday appeared somewhat reserved as the U.S. dollar and bond yields pressed onward. This restraint comes on the heels of the Federal Reserve’s recent indication of an upcoming rate hike this year and a shift in their easing strategy, expected to last until 2024.

Notably, the spot and futures market diverged, with the December Comex Silver and spot Silver (XAG/USD) reflecting -1.39% and +0.43% changes, respectively.

Recent Highs Overshadowed by Monetary Policy

The precious metal’s peak just the previous day, the highest since September 6th, found itself eclipsed by the U.S. Fed’s newly recalibrated economic outlook. This outlook hints at prolonged higher rates, sending ripples of uncertainty through the market. However, the silver market still remains attractive to some speculators, providing a safety net against a sharp decline.

Decoding the Fed’s Hawkish Undertones

Wednesday was a whirlwind in the bond market. Treasury yields leaped after the Federal Reserve hinted at an additional rate increase before 2023 concludes. This decision brought two notable yields to levels unseen in over a decade. Fed Chair Jerome Powell, in a post-meeting press briefing, hinted at a cautious approach to future hikes while acknowledging the challenges posed by persistent inflation.

Despite some market speculation of a nearing end to rate hikes, the Fed’s latest stance suggests a prolonged period of elevated rates to combat inflation. Notably, the central bank’s campaign against inflation started in March 2022 and has been mostly consistent, given the continued moderate inflationary pressures evident in recent reports.

Implications on Silver’s Appeal

Historically, silver’s allure is fortified during inflationary times. Yet, as interest rates ascend, this charm diminishes, predominantly due to the competitive pull of Treasury yields. In other words, as rates rise, demand for silver tends to weaken since the asset doesn’t pay interest to hold it. The immediate future suggests a possible restrained upward momentum for silver.

Short-term Projections for Silver

The current market environment implies a limited upward movement for silver prices in the near term. Potential for a surge might arise from a combined global and U.S. sentiment favoring declining interest rates and a weakening dollar. Nonetheless, silver remains on the radar of central banks, their continuous demand serving as a foundational support for its pricing.

Technical Analysis

Based on the 4-hour data provided for Silver (XAG/USD), the current price of 23.24 sits slightly below the 200-4H moving average of 23.33 but above the 50-4H moving average of 23.06, suggesting a neutral trend and impending moving average breakout. The 14-4H RSI reading of 52.60, while above the neutral level of 50, indicates mildly strengthened momentum but doesn’t signify an overbought condition.

The commodity’s price remains comfortably nestled between the main support area of 22.70 to 22.28 and the main resistance range of 25.00 to 25.27. Given these metrics, the current market sentiment for Silver leans slightly bullish, yet it’s essential to monitor closely for any breakout or breakdown signals.

Generally speaking, look for upside momentum to develop on a sustained move over 23.33 and downside momentum to increase on a sustained move under 23.06