XAG/USD falls back to $23.00 as markets consider the prospect of faster Fed tightening post-hot CPI

  • Spot silver fell back towards $23.00 on Friday, a second day of losses after Thursday’s hot US CPI.
  • The data prompted another hawkish shift in Fed bets on tightening and a rise in US bond yields.
  • Traders also cited hawkish comments from the Fed’s Bullard as a drag on silver,
  • Some analysts believe markets may be overreading his comments.

The sharp reversal in spot silver (XAG/USD) data following hot US consumer price inflation (CPI) from highs in the upper $23.00 a troy ounce continued on Friday with spot prices falling back around the level from $23.00 to test. At one point, the precious metal fell as low as $22.80, but has since traded near the big number again, down about 0.7%, or about 15 cents on the day. Thursday’s hot CPI, which saw headline US inflation hit 7.5% yoy, the highest since 1982, sparked another radical shift in market-based measures of expectations for a 2022 Fed tightening.

That shift was exacerbated by hawkish comments from St. Louis Fed Chair James Bullard, who noted after Thursday’s data that he wanted to see a 100 basis point tightening by the start of the second half of 2022. According to US money market implied probability 50 basis points March rate hike is now strong base case while 175 basis point tightening is expected by the end of 2022. Higher interest rates dampened the appeal of non-yielding assets like silver, so it’s not surprising that prices have trended lower over the past two days.

However, some analysts think markets have gone too far in pricing in a near-term Fed tightening and have put too much weight on Bullard’s comments. In a recent article, CNBC’s Steve Liesman articulated this point, arguing that despite hot inflation, the Fed is likely to take a measured approach to rate hikes (ie, 25 basis points at a time). He cited statements made by Fed policymakers Mary Daly, Thomas Barkin and Raphael Bostic on the inflation data against the idea of ​​a 50bp move.

The dollar’s failure to recover significantly this week may reflect fears that the Fed may fail to meet the market’s very hawkish expectations for monetary tightening. DXY remains stuck below 96.00, which is helping XAG/USD stay on track for about 2.5% weekly gain despite the sharp rise in US curve yields this week. Dollar weakness/silver resilience may also reflect the recent flattening of the US yield curve, suggesting a weaker economic outlook. The 2-year-10-year spread recently fell below 40 basis points for the first time in over 18 months.

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