Silver (XAG) Forecast: Silver Market Faces FOMC, PCE and Wage Risk Next Week

Silver Gains 4% but the Fed Could Take It Back

Spot silver posted its strongest weekly gain in a month as buyers stepped into the correction, but the rally is heading straight into the FOMC meeting on Wednesday and rate-hike expectations that have shifted hard against the metal over the past two weeks. The debate is no longer about when the Fed cuts. It is about whether the next move is a hike and Warsh has given the market no reason to think he is uncomfortable with that repricing.

Spot Silver settled at $58.20, up $2.30 or +4.12%.

A weekly gain after the kind of selling silver took this month looks like real buying. It also arrived while the bond market was pricing tighter policy, the dollar was holding firm and crude was running near levels that keep the inflation story alive. That is not the backdrop where silver rallies tend to last. Silver also carries the industrial demand weight that gold does not, which makes a tighter Fed a problem from both sides of the trade.

Warsh Wants Price Stability and He Is Not Hiding It

Warsh dropped easing language from the June statement, skipped the dot plot and told the ECB Forum that prices are too high. He has not said a single thing since taking the chair that suggests he is in a hurry to make life easier for silver bulls. Fed funds futures already reflect that with a 35.8% chance of a July hike and 79% cumulative odds of tightening by September. Those numbers were near zero two weeks ago.

Wednesday afternoon is where silver’s rally either survives or gets taken apart. If Warsh leans into the oil-driven inflation story, yields and the dollar respond and the sellers who stepped back last week come right back. If he holds without adding pressure, the buyers defending the recent lows keep their trade. The range breaks Wednesday one way or the other.

PCE and Wages Round Out the Week

Thursday’s GDP and personal income data at 12:30 GMT land the morning after Warsh speaks and the PCE number inside that release either confirms or undercuts whatever the market takes from the press conference. A hot print after a hawkish Wednesday locks in the selling. A soft number pulls the rate conversation back and gives last week’s buyers room to stay.

Friday’s Employment Cost Index at 12:30 GMT closes the week. Wages running hot after a hawkish Fed and firm PCE keep the dollar bid through the weekend. Wages coming in soft give the bond market a late reason to ease up and help silver hold into the close.

Silver’s Industrial Side Makes the Rate Risk Worse

Gold gets some cover from the geopolitical bid when the war heats up. Silver has that element but it also carries the industrial weight that gold does not. Higher borrowing costs slow manufacturing activity and weigh on the fabrication demand that accounts for a large share of physical silver consumption. A Fed that is tightening or signaling it will tighten hits silver from the investment side and the industrial side at the same time.

That is the squeeze last week’s rally has not resolved. Buyers who stepped in were trading value after a correction. They were not trading an improving rate outlook or stronger industrial demand. If the FOMC confirms the rate story the bond market is already pricing, last week’s rally looks more like a bounce inside a larger correction than the beginning of something sustainable.

Weekly Spot Silver (XAGUSD) Technical Analysis

Spot silver is in a downtrend, but last week, it managed to close higher, turning $54.78 into a new minor bottom. A trade through this level will be a sign of weakness. If selling accelerates through this minor bottom, support at $46.48 to $45.55 will hit the radar.

On the upside, the first level to overcome is the long-term 50% level at $60.835. Trading on the bullish side of this level will put the market in a position to challenge the 52-week moving average at $64.59. This is the first major trend indicator that buyers have to overcome to extend the rally.

For longer-term investors, the 50% to 61.8% retracement zone of the all-time high at $121.67 is $60.835 to $46.48.

While we support the building of a support base, we really can’t get excited about the long side until buyers can overcome the 52-week moving average and hold it as support.

What to Watch

Wednesday’s press conference breaks the range silver has been stuck in and the data Thursday and Friday determines whether the move holds into the weekend. The industrial side of silver’s demand picture adds another layer of risk if borrowing costs keep climbing. Silver rallied last week while every rate signal was moving against it and that disconnect resolves this week.

The downtrend is intact and the market has to clear the long-term 50% level before the rally can be taken seriously. The 52-week average above that is the real barrier. Last week’s minor bottom is the floor and a break below it signals the correction is not finished.

More Information in our Economic Calendar.