Silver Price Forecast: Improving Sentiment & Fed Policy May Weigh on Precious Metals
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SILVER PRICE (XAG/USD) OUTLOOK:
- Silver prices have corrected lower in recent days amid improved market sentiment on signs that Russia and Ukraine are making progress towards a ceasefire agreement
- The Fed's monetary policy outlook could become a negative catalyst for precious metals if policymakers back an aggressive tightening cycle
- In this article we analyze key technical levels for XAG/USD
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Silver is a widely used industrial metal, but it also has safe-haven characteristics and significant sensitivity to interest rate expectations, like gold. Recently, during the risk-off episodes and widespread volatility following the Russian invasion of Ukraine, both precious metals moved in lockstep, showing a stronger positive correlation than usual.
When market stress was at its peak last week, with the VIX near the 40 level and major equity indices in freefall, both XAG/USD and XAU/USD rallied aggressively to multi-year highs in tandem with rising inflation expectations and falling real yields. Since then, nerves have calmed and markets have stabilized, paving the way for a sharp pullback in silver prices, which now stand near $24.6, about 8% below last Tuesday's high.
SILVER PRICE, 10 YEAR REAL YIELD & 10-YEAR BREAKEVEN INFLATION RATE
Although the military conflict in Eastern Europe remains unresolved, the geopolitical risk premium appears to be diminishing on signs that Moscow and Kiev are making progress towards a neutrality plan to end the ongoing war. On that note, if sentiment continues to improve, precious metals could accelerate their correction in the coming days and weeks.
Another catalyst that could reinforce the sell-off in this space is the Fed monetary policy’s outlook, with the U.S. central bank slated to begin raising borrowing costs today in an effort to curb red-hot inflation. If policymakers endorse an aggressive normalization cycle, comprised of several interest rates hikes and quantitative tightening, real rates could begin to rise again and become less negative after the deep drop in the last month or so. This could undermine silver and gold (real rates would rise if nominal rates increase and inflation expectations begin to decline).
Focusing on technical analysis, silver prices have fallen below support at $24.70 at the time of writing. If the breakout lower is confirmed, selling pressure could intensify and set the stage for a pullback towards $24.15/24.05, a key floor created by the 38.2% Fibonacci retracement of the December 2021-March 2022 rally. If this area were to be breached, $23.50 would become the next downside focus.
On the flip side, if XAG/USD inflects higher from current levels, the first resistance to consider appears at $25.35. If bulls manage to push the price above this barrier, silver could be on its way to retest the 2022 high near $26.93.
SILVER PRICE TECHNICAL CHART
Silver Price Chart Prepared Using TradingView
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---Written by Diego Colman, Contributor
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.