Silver (XAG) Forecast: Dollar Caps Silver Rally Despite Soft CPI and PPI

Silver Got the Data It Wanted and Still Lost the Week

Spot silver reached $66.80 earlier this week, its highest price since June 18, after the payrolls miss and back-to-back soft inflation reports pulled September hike odds down hard. The metal is lower for the week anyway. That is the story. CPI came in contained. PPI was even softer.

Treasury yields dropped. The Fed-hold trade picked up momentum. None of it was enough to keep buyers pressing the high because the dollar refused to break down and the market sold the strength instead of building on it.

The main trend is still up on the swing chart but the failure to hold above $66.00 after reaching $66.80 says the rate-relief trade needs more than friendly data to carry silver higher from here.

At 09:29 GMT, Spot Silver (XAGUSD) was trading at $64.69, up $0.22 or 0.33%.

Daily Spot Silver (XAGUSD) Technical Analysis

Spot Silver (XAGUSD) is edging higher on Friday as traders attempt to hold on to this week’s gains. Last week, the market closed at $63.56. Today it hit an intraday low at $63.51 before rebounding. That’s an example of defensive buying.

The main trend is up according to the daily swing chart. A trade through $66.80 will signal a resumption of the uptrend. If this creates enough near-term momentum, the market could take a run at the 200-day moving average at $71.51.

If the short-term weakness continues then the chart pattern suggests a break into the 50-day moving average at $61.35 can be anticipated. This is followed by 50% of the all-time high at $60.835.

The market seems to be offering bullish traders the opportunity to buy strength through $66.80 or passively bid on a pullback to $61.35 to $60.835.

Two Inflation Reports Cut Into the Hike Case and Silver Still Sold Off

July CPI rose 0.1% from June with the annual rate at 3.4% and core at 2.5%. Thursday’s PPI was flat against expectations for a 0.2% increase and core came in at 0.2% versus a 0.3% forecast. Two straight reports telling the market that inflation is not accelerating, and the payrolls miss from last week was already doing the work before either number landed.

Fed-funds futures shifted to roughly 65% probability of a hold in September, up from near a coin flip a week ago. Silver rallied on that adjustment. Then the same buyers who came in on the rate shift took money off the table. The data improved the fundamental case. The market had already priced most of it before the reports confirmed what traders expected.

The Dollar Stayed Firm Through Every Soft Print

Treasury yields dropped after PPI Thursday. The 10-year fell to 4.645%. The two-year dropped to 4.145%. The 30-year eased to 5.214%. Silver should have held its rally with that move underneath it. The dollar near recent highs is the reason it did not.

The bond market cooperated all week. The currency market did not. Silver reached $66.80 with yields moving lower and the dollar holding firm. That combination puts a ceiling on the trade because a firm dollar raises the cost of silver for buyers outside the United States. The metal got one side of the rate trade working in its favor. It needed both.

The Strait of Hormuz staying restricted is part of the reason the dollar held. Geopolitical uncertainty keeps a bid under the greenback even as rate expectations shift lower. Silver is trading the rate outlook. The dollar is trading the conflict. They are looking at different sides of the same story and this week the dollar won.

The Fed Is Not Done Debating and Oil Keeps the Door Open

The inflation reports weakened the September hike case. They did not settle it. The Fed is still split. Some officials are focused on the risk that oil pushes inflation higher again. Others now have weaker payrolls, soft CPI and flat PPI to argue that another increase can wait.

Crude pulled back this week on OPEC and IEA demand downgrades, which takes some pressure off the headline inflation number the Fed watches. But oil is still well above pre-conflict levels and the strait is still restricted. A fresh move higher in crude rebuilds the inflation argument that two soft reports just weakened. Silver is not trading the war. It is trading what the war does to fuel costs and what fuel costs do to the Fed.

What to Watch

Silver enters the weekend with a better rate backdrop than it had a week ago. The payrolls miss started it. CPI did not reverse it. PPI reinforced it. September hold odds at 65% are a real shift from where they were seven days ago. The metal still could not hold above $66.00 after reaching $66.80, and the dollar staying firm through every soft print is the reason the rate-relief trade did not translate into a sustained rally.

The main trend is up and Friday’s bounce off last week’s close at $63.51 shows defensive buying near support. A push through $66.80 resumes the uptrend with the 200-day moving average at $71.51 as the next target. A failure to hold and a break toward the 50-day at $61.35 tells you the rate trade was not strong enough to overcome the dollar headwind.

More Information in our Economic Calendar.