Silver (XAG) Forecast: Can Fed Rate Cut Expectations Sustain Silver’s Uptrend?

Silver Prices Edge Higher as Fed Rate Cut Expectations Grow

Silver prices rose on Thursday, buoyed by growing expectations that the Federal Reserve may initiate interest rate cuts as early as next month. This optimism, coupled with ongoing geopolitical tensions in the Middle East, helped lift silver despite a stronger U.S. dollar. Investors also remained focused on a slew of U.S. economic data set for release this week.

At 10:35 GMT, XAG/USD is trading $29.57, up $0.44 or +1.51%.

Fed Rate Cut Speculation Supports Silver

Silver’s upward movement on Thursday was primarily driven by weaker U.S. Treasury yields and increasing speculation that the Federal Reserve will cut interest rates soon. The yield on the 10-year Treasury note dropped slightly to 3.825%, while the 2-year yield also edged lower, signaling investor anticipation of a potential easing in monetary policy.

The upcoming release of the U.S. personal consumption expenditures (PCE) price index on Friday, which is the Fed’s preferred inflation gauge, has further intensified focus on the central bank’s next moves. Market participants are pricing in a 65.5% chance of a 25-basis-point rate cut at the Fed’s September 18 meeting, with a 34.5% chance of a larger 50-basis-point reduction, according to the CME Group’s FedWatch Tool.

Economic Data and China Demand in Focus

In addition to Fed rate cut speculation, traders are closely watching several key U.S. economic data releases. Initial jobless claims and second-quarter gross domestic product (GDP) figures are due to be published on Thursday, followed by pending home sales data later in the day. These indicators will be scrutinized for further clues on the state of the U.S. economy and the likelihood of the Fed easing monetary policy.

However, concerns over weak Chinese demand for silver continue to linger in the background. China is a significant consumer of silver, particularly in industrial applications. Sluggish demand from China could potentially weigh on silver prices in the long term, even as investors focus on U.S. economic data and Fed policy. The recent softness in Chinese economic data has raised concerns about the sustainability of silver’s current price levels.

The release of the PCE price index on Friday is particularly critical. Although analysts doubt it will significantly alter market expectations for the Fed’s policy direction unless it deviates substantially from forecasts, it remains a crucial data point for traders.

Silver Outlook: Bullish but Cautious

Looking ahead, silver appears resilient, especially in a low-interest-rate environment where it becomes more attractive as a non-yielding asset. However, the metal could face short-term pressure if upcoming economic data dampens expectations for a rate cut. Additionally, persistent concerns over weak demand from China may cap gains in the longer term, especially if the Chinese economy continues to struggle.

Despite the dollar’s recent gains, which typically weigh on silver, the prospect of lower U.S. interest rates has kept investor sentiment positive. In summary, silver is likely to maintain its strength in the near term, supported by the growing likelihood of Fed rate cuts. However, any significant deviations in upcoming economic data or continued weakness in Chinese demand could lead to a pullback in prices. Traders should remain vigilant as the market reacts to these key economic indicators and international demand factors.

Technical Analysis

XAG/USD is edging higher on Thursday after a successful test of the 50-day moving average at $29.20. Traders are trying to claw their way back to the $30.00 level that could serve as a launching pad for a breakout to the upside.

A sustained move under the 50-day moving average could lead to a quick test of the minor bottom at $28.79. Taking out this level will shift momentum to the downside with $28.22 the initial target.