Silver Prices Forecast: Could Upcoming PCE Report Sway Fed’s Rate Cut Strategy?

Key Points

• Silver records third loss in four weeks
• Fed’s cautious rate stance impacts silver prices
• Rising Treasury yields, stronger dollar pressure silver

Silver’s Price Movement

Silver settled lower last week, marking its third loss in four weeks. This trend was largely driven by Federal Reserve policymakers’ remarks, which diminished the likelihood of an imminent rate cut.

Silver (XAG/USD) settled at $22.62, down $0.57 or -2.47%.

Federal Reserve’s Stance

Federal Reserve officials, including Chicago Fed President Austan Goolsbee and Atlanta Fed President Raphael Bostic, expressed a need for caution in rate adjustments. Goolsbee called for more inflation data before any rate cut decisions, while Bostic indicated potential rate cuts starting in the third quarter. This cautious sentiment was reinforced by other Fed members like San Francisco Fed President Mary Daly and Governor Christopher Waller, advocating a gradual approach to rate changes.

Impact on Treasury Yields and the Dollar

The cautious stance from the Fed not only influenced the U.S. Dollar but also impacted Treasury yields. Last week, the 10-Year U.S. Treasury yield rose to 4.145, up by 0.196 or +4.96%, reflecting increased investor interest in government securities. This rise in yields, coupled with a 1% increase in the U.S. Dollar index (DXY), made dollar-denominated silver more expensive for foreign investors.

Economic Indicators

Market speculation about the Fed’s rate cut timeline was mirrored in silver’s price fluctuations. Traders now anticipate a lower chance of a March rate cut, with expectations shifting towards May. Economic data reinforced this view, with unexpectedly low weekly jobless claims and a significant rise in the University of Michigan’s Consumer Survey indicating a strong U.S. economy. Additionally, U.S. retail sales in December exceeded expectations, further cementing the economy’s robustness.

Short-term Outlook for Silver

In the upcoming week, the short-term outlook for silver is cautiously bearish, influenced by several key economic indicators and Federal Reserve policy. The Fed’s reluctance to implement early rate cuts diminishes the immediate appeal of silver as a hedge, with the focus shifting towards yield-bearing assets as reflected in the recent rise of the 10-Year U.S. Treasury yield. Additionally, the strength of the U.S. Dollar, evidenced by the increase in the Dollar index (DXY), could suppress foreign demand for silver.

Critical economic reports due next week, including the Flash Manufacturing and Services PMI, Advanced GDP, Core PCE Price Index, and Personal Income and Spending data, will be pivotal. Strong economic growth indicators or higher-than-expected inflation figures could reinforce the dollar’s strength, exerting further pressure on silver prices. Traders should brace for potential market volatility around these releases and maintain a flexible strategy, ready to adapt to the evolving economic landscape.