XAG/USD holds above $22.50 for now but Fed threatens

  • Despite trading weaker on Tuesday, silver is holding above $22.50 for now as bears eye yearly lows below $22.00.
  • Macro strategists warn that further downside is likely as the Fed begins aggressive monetary tightening.

Although prices have been able to fend off a retest of Monday’s lows in the $22.12 area and yearly lows just below the $22.00 a troy ounce level for the time being and are still trading north of the $22.50 level, trading Spot Silver (XAG/USD) continues to trade with a bearish bias on Tuesday as traders brace for monetary tightening by the Fed later this week and a flurry of Tier 1 data releases from the US Set US.

From the current level of $22.50, XAG/USD is trading down around 0.4% on Tuesday, with its week-to-date losses escalating around 1.0% and losses since mid-April highs above $26.00 about 14% decrease. Silver’s recent weakness is not surprising given the macro backdrop that has pushed the US dollar and US yields to multi-year highs.

Although slightly lower on Tuesday, the DXY is still trading at 103.00, not far from the multi-year highs printed at 104.00 last week, and rose from around 100 as late as mid-April. Meanwhile, US 10-year Treasury yields continue to flirt with multi-year highs around 3.0% after falling below 2.50% in early April.

A stronger US dollar makes USD denominated commodities like XAG/USD more expensive for international buyers, while higher yields increase the opportunity cost of holding non-yield, hence the negative correlation of both with silver. Macro strategists are warning that the dollar’s recent strength and the rebound in US yields could continue this week as the Fed is expected to hike rates by 50 basis points on Wednesday, taking rates to around 2.5% by year-end and will announce quantitative tightening plans.

Some have said that with so much Fed hawkishness already priced into markets, the risks tend to be that Fed Chair Jerome Powell doesn’t live up to the hype and a dovish market response thereafter. While that could be the case, any rebound in XAG/USD is likely to be short-lived, with a recovery above the 200-day moving average near $23.80 looking unlikely. As long as the Fed appears intent on pursuing swift policy tightening, risks appear to be biased towards the 4Q21 precious metals test lows in the mid-$21.00s.

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