Ongoing competition between macroeconomic forces is dictating silver price action ahead of the Fed’s interest rate decision at 18:00 GMT.
On the one hand, we have renewed strength in the U.S. dollar, powered by higher Treasury yields as crude oil prices continue to strangle risk-associated assets; consequential upside moves in U.S. bond yields have been pushing the U.S. dollar higher and creating headwinds for precious metals.
On the other hand, geopolitical uncertainty persists amid resilient industrial demand. Furthermore, expectations that investment will continue in clean energy and artificial intelligence infrastructure continue to underpin the longer-term outlook for silver prices.
A rebound in Brent crude has followed the three-day moderation in oil prices. As markets continue to reassess further disruption to global energy supplies, the Fed will have to decide whether to hike interest rates now to curb past oil inflation pressures or wait until September. Already, some institutional analysts are predicting an adjustment at today’s meeting. Citadel Securities is one of them, and the company believes that the Fed will need to act now to hike rates to make a powerful statement that reinforces its stance on bringing U.S. inflation back to target levels.
Macro Drivers for Silver Price
1) Higher US Bond Yields
The inflationary pressures brought on by the Middle East geopolitical situation have led the market to tilt in favor of Fed hawkishness. This is leading to a rise in U.S. bond yields, strengthening U.S. dollar demand. As the demand for the U.S. dollar increases, silver becomes more expensive for non-US buyers. Furthermore, silver’s non-yielding status makes it very vulnerable in risk-averse situations, where capital typically flows into assets with stable yields, such as U.S. Treasuries.
2) Strong Industrial Demand
Despite pressure from rising U.S. bond yields, the structural long-term fundamentals for silver remain strong. Silver’s industrial applications have continued to expand, with demand driven by increased investments in AI infrastructure, semiconductor production, electric vehicles, new battery technologies, and expansion of electrification projects in many countries such as India. Furthermore, the increase in solar panel manufacturing as part of green energy transition initiatives is also proving to be a structural demand driver. This structural demand is seen as a limiting factor for further downside action in silver.
3) Geopolitics
The volatile geopolitical situation remains a near-term macro driver for silver prices. The situation continues to drive safe-haven demand. However, a certain level of defensive positioning in silver is helping to curtail the impact of geopolitics on silver prices. Silver prices are expected to continue to see increased market volatility, and any renewed escalation of military tensions could revive stronger safe-haven flows out of silver than into the U.S. dollar.Â
Near-term Price Catalysts
1) Supply Constraints
The vast increase in demand for silver worldwide means that production from existing mines has struggled to keep pace with this growth in industrial consumption. Investors are continuing to monitor mining output data, as well as data from ETF flows, exchange inventories, and recycling supplies. The further tightening in the physical supply market will provide long-term support for silver prices.Â
2) Manufacturing Data
PMI data from the U.S, Europe, and China will continue to influence silver price demand and have an impact on silver prices in the medium term.
3) U.S. Dollar Strength
Fed expectations and the U.S. dollar will continue to be near-term price drivers. Today’s interest-rate decision, the language in the rate statement, and the Fed press conference would provide more insight into the direction of U.S. Treasury yields and the U.S. dollar. A weaker U.S. dollar would trigger renewed silver buying, but a stronger U.S. dollar would cause investors to dump the white metal in favor of the safe-haven USD.
Silver Price: Forecast Scenarios
Base case: The base case scenario is one of consolidation, as silver narrows into a two-way consolidation pattern in the face of the current geopolitical oil shock. The dollar’s strength is expected to lead to a downside move in the pair, but this will be counteracted by structural and industrial demand for silver.
Bull case: A weakening of the U.S. dollar due to declining Treasury yields and upbeat global manufacturing data will promote an increase in industrial demand. Silver could outperform other precious metals due to its industrial exposure. This is seen as a bull-case scenario and would allow silver to recover above recent resistance levels.
Bear case: Higher U.S. bond yields will lead to continued U.S. dollar appreciation, a silver-negative scenario. If there is sustained deterioration in geopolitical conditions and weaker Chinese data in terms of manufacturing, silver could revisit some of the downside targets seen earlier this month.
Silver Price: Technical Outlook
Within the context of the consolidation painted in pink on the chart, the 4-hour chart shows a double top that remains in evolution. The price action is now testing the 56.91 neckline support. A breakdown here unlocks access to the 54.68 support and prior low of 17 July.
This view is invalidated if the bulls defend the 56.91 support. A bounce here first tests the 60.00 psychological price mark and site of the lower top. If this barrier is uncapped, the 61.07 high is next, followed by the 63.37 high of 5 July.
