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Downside risk accelerates on Silver price as FOMC looms

Downside risk accelerates on Silver price as FOMC looms

2014-02-01 00:33:00
Research, Research Team
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Main Points

  • Silver must find support above $19.31 to be in bullish trend
  • Positive divergence can be noted with MACD
  • FOMC likely to announce $10 billion tapering in asset purchase program

Silver has been maintaining a tight range since the beginning of January. The white metal closed at $19.69 per ounce on Monday with a lengthy bearish engulfing candle thus showing serious signs of weakness amid FOMC monetary policy meeting.

At the moment of writing in London session precious metal is being traded at $19.73 with immediate support seen around $19.66 ahead of $19.31 which is swing low of previous wave. It is pertinent that after printing Higher High (HH), bullion must find support above $19.31 thus making a Higher Low (HL) in order to be in bullish trend. In case we see Lower Low (LL) in silver price, this will turn our bias into bearish and in that case double bottom support zone may come under attack in near future.

silver_price_fomc_downside_body_Picture_2.png, Downside risk accelerates on Silver price as FOMC looms

On upside first hurdle is seen around $20.30, 38% fib level and historical resistance zone for bullion. A break above would be targeting $20.57 ahead of 20.83 which is 50% fib level and a confluence zone of moving averages.

Relative Strength Index (RSI) and Commodity Channel Index (CCI) both are hovering in bearish territory but well above oversold zone on four hour chart which means we cannot rule out more dips in bullion price.

silver_price_fomc_downside_body_Picture_1.png, Downside risk accelerates on Silver price as FOMC looms

MACD is however diverging positively on four hour timeframe as shown in above chart that is good news for white metal. So in short term we would closely monitor ending point of current wave, a lower low will certainly increase downside risk.

Talking about macroeconomic scenario we have a number of important fundamental events in-line this week that will set the medium term direction for silver. US Durable Goods Orders report for December is scheduled to release later in the US session today. Analysts are expecting 1.8% read this time around, lower than previous 3.4%.

Then tomorrow is a big day as Federal Open Market Committee (FOMC) is due to announce its decision on benchmark interest rate as well as pace of monthly asset purchase program. Analysts are unanimous that committee would keep interest rate unchanged however there are bright chances that we could see more tapering since jobless rate had fallen to 6.7% in December. According to average projection of analysts, $10 billion reduction in monthly bond buying program is likely at this meeting. If it happens, bullish momentum in greenback would accelerate and consequently we may see a slump in silver price which is already being traded below its production cost.

On Thursday US growth and inflation reports for fourth quarter are also scheduled for release. Analysts have predicted a slowdown in growth both at YoY and QoQ comparison. According to median projection of analysts, US growth in fourth quarter is seen at 1.4% against last quarter’s 2.0%. Personal Consumption Expenditures Prices (PCEP) for fourth quarter is likely to be at 0.8% as compared to previous quarter’s 1.9%.

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