Silver prices are slightly higher today, but price remains range bound and the bigger picture of a downward trend is still intact. This will remain so as long as the price trades below the December 28 high of $14.40. If price does break this high, silver may reach the December 7 high of $14.62. This is not however my primary view, and I would still expect the price to trade lower in order to reach the lower end of the December price range at $13.61. I am long-term bearish silver in the same vein that I am bullish the U.S. Dollar.
According to its own projection, the Federal Reserve is expected to raise interest rates by 100 bps by the end of 2016. The market, however, is only anticipating 70 basis points worth of rate hikes over the same period (based on OIS). With this in mind I see scope for further Dollar gains and with these, lower silver prices.
A risk to this outlook is of course the U.S. economy, which is not running as smoothly as one would have hoped. Yesterday, the US ISM manufacturing index slipped to 48.2 from 48.6 and thereby missed expectations that it would print 49. This highlights a severe slowdown in the U.S. manufacturing sector, which may eventually derail the U.S. economy along with the idea of the FED aggressively hiking rates.
Another risk to this outlook is stubbornly low inflation. PCE headline inflation is running at 0.4% YoY and would need to move closer to 1.6% (Fed’s own projections), to motivate higher Fed fund rates. Lifting rates without a strong inflationary surge would leave the inflation-adjusted Fed rate too high, thereby in turn potentially hampering U.S. growth.
How are traders positioned? At this point, they are betting against Dollar gains in the following currency pairs: EURUSD, GBPUSD, AUDUSD, and USDCAD. As the FXCM SSI is a contrarian indicator, it suggests that we should be buying Dollars and (with this in mind) supporting a bearish view on silver prices. See more here
Silver Price (XAGUSD)
Created with Marketscope/Trading Station II; prepared by Alejandro Zambrano
--- Written by Alejandro Zambrano, Market Analyst for DailyFX.com
Contact and follow Alejandro on Twitter: @AlexFX00
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