Silver (XAG) Forecast: Dollar Unwind Could Support Silver Rally as Fed Odds Fall

Silver Trades the Rate Repricing, Not the Headline

Silver is not rallying on the Fed hold. It is rallying on what happened to September hike odds after the hold. The FOMC left rates at 3.50% to 3.75% in a 9-3 vote with Hammack, Logan and Kashkari wanting a quarter-point increase, and the market came in treating a September hike as close to a done deal. Those odds dropped after the decision, the dollar lost its bid, and silver caught the move before the bond market had even finished sorting out what Warsh meant.

At 08:31 GMT, spot silver is trading $58.04, down $0.95 or 1.60%.

The metal can keep rising if the rate market continues pulling September back. It does not need the Fed to sound dovish. It needs the odds to keep falling.

Daily Spot Silver (XAGUSD) Technical Analysis

Spot silver is down early Friday as it continues to hover around a key short-term retracement zone that could determine its next major move. At 08:31 GMT, XAGUSD is trading $58.04, down $0.95 or -1.60%.

The short-term range is $54.78 to $60.94. The short-term retracement zone I am referring to is $57.86 to $57.13. Trader reaction to this zone could set the tone today.

A sustained move over $57.86 will indicate the presence of buyers. If the move can create enough upside momentum, the market could see a surge into the long-term 50% level at $60.835 and the last swing top at $60.94.

A breakout over $60.94 could lead to a test of the swing top at $63.28. Taking out this top will likely have buyers targeting the 50-day moving average at $63.66 next. This moving average hasn’t been tested since June 2. Trader reaction to this indicator will determine whether silver extends the rally into the 200-day moving average at $70.77 or breaks back below the 50% level at $60.835.

A sustained move under the short-term Fibonacci level at $57.13 will be a sign of weakness. If the selling is strong enough to take out the minor bottom at $56.64 then look for a possible test of the main bottom at $54.78.

For longer-term investors, $60.835 to $46.48 represents a potential value area. The current monthlong $63.28 to $54.78 trading range could be signaling accumulation by these players. In my opinion, they may be laying the foundation for a rally, but it’s going to take aggressive buying by short-term speculators to drive the next rally.

The Dollar Broke and Silver Followed

Three officials voted to hike and Warsh refused to give anyone a schedule for September. That is not dovish. But the market had priced something worse, and the gap between what traders expected and what they got sent the dollar lower. Silver grabbed the move immediately.

The 30-year yield near 5.24% did not stop the rally and that is worth noting. The highest long-end print since 2007 is sitting right there and silver is climbing anyway. The dollar unwind is overpowering it for now. Two weeks of long-dollar positioning built ahead of the Fed meeting is coming off, and that flow matters more to silver today than what the bond market thinks about inflation over the next decade.

I would not count on that lasting. Warsh gave the market no dot plot, no projections and no promise to wait. He set it up so the next inflation print or payrolls report can put September right back on the table overnight. The dollar stops falling the moment that happens, and silver loses its one support.

Crude Decides How Long the Window Stays Open

Oil is the reason the September debate did not die Wednesday. Renewed fighting in the Middle East has kept crude elevated, and the next inflation report picks up more of that energy cost than June’s data did. The three dissenters already have their argument on the record. One more firm print hands them the data to act on it.

Silver has a window right now between the Fed hold and the next set of numbers. Crude staying above $85 is what makes that window narrow. Every day oil holds here is another day the hawks can point to and say the inflation problem is getting worse, not better.

What to Watch

September odds are the cleaner signal right now. If hike expectations keep falling and the dollar continues to unwind, silver holds the bid. If the odds start rebuilding on the next data release or another oil headline, the dollar finds a floor and sellers come back. FedWatch tells the story faster than trying to parse every sentence from Warsh’s press conference.

Silver has been sitting in the retracement zone for over a week and the Fed did not break it out. The accumulation pattern underneath the market gives buyers a foundation, but the longer-term investors building that base are not the ones who drive the breakout. Short-term speculators have to step in aggressively above the zone, and they are not going to do it with the 30-year above 5% and crude keeping the next inflation print in doubt. The rate picture has to keep cooperating or this range resolves lower.

More Information in our Economic Calendar.