Silver (XAG) Forecast: Prices Bounce on Dovish Fed Outlook, Technical Analysis Warns of Risks

Silver Prices Edge Higher After U.S. Inflation Report

Silver prices are climbing on Friday, supported by the release of the U.S. Personal Consumption Expenditures (PCE) price index for August. Although the market remains below Thursday’s high of $32.72, which marked a new yearly peak, silver has rebounded from earlier weakness. Traders remain cautious, as the metal’s strong uptrend leaves it vulnerable to corrections, especially with prices significantly above the 50-day moving average. This suggests silver may be in overbought territory, and a downside correction could follow in the near term.

At 13:14 GMT, XAG/USD is trading $32.21, up $0.20 or +0.62%.

Key U.S. Inflation Data Eases Pressure on Fed

The U.S. PCE price index, a key inflation measure watched closely by the Federal Reserve, showed a 0.1% monthly increase in August, putting the 12-month inflation rate at 2.2%. This is a notable decline from July’s 2.5%, and the lowest inflation level since February 2021. The core PCE, which excludes volatile food and energy prices, also rose by 0.1%, bringing the yearly core rate to 2.7%.

These inflation figures came in lower than expected, as economists had forecast a 2.3% rise in all-items PCE and 0.2% for core PCE on a monthly basis. The lower-than-anticipated inflation numbers provide a clearer path for the Federal Reserve to consider future interest rate cuts, aligning with its inflation target of 2%.

Fed’s Shift from Inflation Control to Economic Support

Recent developments indicate the Federal Reserve may be moving from a focus on inflation control to a broader strategy aimed at supporting the economy. Personal income and spending figures for August were weaker than expected, each rising only 0.2% against forecasts of 0.4% and 0.3%, respectively. Additionally, housing costs saw a significant 0.5% increase, the largest rise since January, indicating continued inflationary pressure in the sector.

Despite this, the PCE data may offer the Fed breathing room to ease monetary policy. The central bank recently cut interest rates by half a percentage point, bringing the federal funds rate to a range of 4.75%-5%. Fed officials have hinted at the possibility of another half-point rate cut before the year ends, and the markets expect further reductions through 2025 as the Fed looks to bolster a labor market showing signs of softening.

Silver Market Forecast

With inflation cooling and the prospect of more interest rate cuts on the horizon, silver could maintain its bullish momentum in the short term. Lower interest rates typically weaken the U.S. dollar, boosting demand for safe-haven assets like silver. However, the metal’s overbought technical position raises the possibility of a correction, especially if profit-taking occurs. Traders should remain cautious, as silver may face volatility as the Fed fine-tunes its monetary policy in the months ahead.