Silver Prices Forecast: XAG/USD Faces Bearish Trend Amid Rate Uncertainty

Highlights

• Silver prices near one-month lows, pressured by a strong dollar and Fed rate pause prospects.
• Mixed U.S. inflation data solidify expectations of Fed maintaining rates, impacting Silver’s appeal.
• Expectations grow for the Fed to keep rates steady in September, with a 60% chance of a pause in November.

Silver (XAG/USD) Prices Near One-Month Lows Amidst Dollar Strength and Fed Rate Pause Expectations

Silver (XAG/USD) prices are facing downward pressure as they approach one-month lows. This decline is primarily attributed to the strengthening U.S. dollar and the growing likelihood of a Federal Reserve rate pause. The recently released U.S. inflation data, although mixed, has solidified expectations of the Fed maintaining interest rates next week. This has diminished the attractiveness of non-interest-bearing assets like Silver in the eyes of investors.

While U.S. consumer prices surged in August, driven by soaring gasoline costs, the annual increase in underlying inflation was the smallest in nearly two years. This discrepancy has created uncertainty regarding the Fed’s rate trajectory for 2024.

Traders Expect Unchanged Rates This Week with a Possibility of a Rate Hike in November

Market sentiment currently suggests a 97% probability that the Fed will keep interest rates unchanged in the upcoming week. However, there is a 40% chance of a rate hike in November, according to the CME’s FedWatch Tool. Simultaneously, the European Central Bank is considering raising its key interest rate. The decline in holdings of the SPDR Gold Trust by 0.3% further underscores weakening demand for gold and silver.

Impact of a Stronger Dollar and Fed’s Intent to Maintain Rates

The stronger U.S. dollar, reinforced by the inflation data, has made Silver relatively more expensive for investors holding other currencies. While the Consumer Price Index (CPI) figures largely met expectations, they imply that the Federal Open Market Committee (FOMC) is inclined to keep interest rates steady.

This expectation has provided a temporary support level for Silver. As the outlook for the Fed points towards maintaining rates both in September and potentially in November (with a 60% likelihood), investors are increasingly drawn to higher-yielding assets such as U.S. Treasury bonds, diverting their attention away from zero-interest Silver.

Shifting Investor Concerns from Inflation to Opportunity Costs

Investors are now primarily concerned about the opportunity costs associated with holding Silver in an environment of rising interest rates. The focus is shifting from inflation worries to the implications of keeping a non-interest-bearing asset like Silver amidst increasing interest rates.

All eyes are now on forthcoming economic data, including U.S. August producer prices and retail sales figures, along with the European Central Bank’s interest rate decision. These events precede the highly anticipated Fed policy announcement scheduled for September 20.

Bearish Pressure on Silver Due to Strong Dollar, Expected Fed Rate Pause, and Reduced Demand

In summary, Silver is currently facing bearish pressure driven by multiple factors, including the strength of the U.S. dollar, the prospect of a Federal Reserve rate pause, and a decline in demand as indicated by the reduced holdings of the SPDR Gold Trust. These combined factors challenge the appeal of Silver as a non-interest-bearing asset in an environment where interest rates are on the rise.

Technical Analysis

Spot Silver (XAG/USD) currently trades at $22.53, below the 200-4H moving average of $23.47 and 50-4H moving average of $23.23, indicating a bearish trend. The 14-4H RSI at 27.59 signals an oversold condition, reflecting weakened momentum.

The main support area lies between $22.70 and $22.28, while the main resistance zone ranges from $25.00 to $25.27. Presently, the price is inside the support zone but below resistance levels. This analysis suggests a bearish sentiment in the market. Traders should exercise caution, monitoring for potential reversals due to the oversold conditions.