Silver (XAG) Forecast: Fed Policy and Economic Data Shape Market Sentiment

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Editorial Board22/12/2024

Silver prices took a significant hit this week, declining 3.41% to $29.51 as investor sentiment shifted due to hawkish signals from the Federal Reserve. The precious metal, known for its dual role as a safe-haven asset and an industrial commodity, faced a challenging week marked by rising U.S. Treasury yields and a stronger dollar. Despite signs of cooling inflation, silver’s attractiveness diminished under the weight of Federal Reserve policies and broader market pressures.

In this article, we explore the key factors driving silver’s recent decline, what traders should watch for, and whether upcoming economic data could offer a path to recovery.

What to Know

  • Silver Prices Decline: Silver dropped below critical support levels, ending the week at $29.51.
  • Fed’s Hawkish Stance: The Federal Reserve signaled only two rate cuts for 2025, pushing yields higher and reducing silver’s appeal.
  • Economic Data in Focus: Investors are now turning to jobs data and inflation reports for further market direction.

Weekly Breakdown: Why Did Silver Prices Drop?

Fed’s Hawkish Policy Maintains Pressure

Silver’s decline was largely attributed to the Federal Reserve’s hawkish stance. During its latest policy meeting, the Fed indicated that it anticipates only two rate cuts in 2025, signaling a slower easing of monetary policy than many had hoped.

This hawkish outlook pushed U.S. Treasury yields higher, making bonds a more attractive investment compared to non-yielding assets like silver. Additionally, the U.S. dollar strengthened, further eroding silver’s appeal for international buyers, as a stronger dollar makes commodities priced in dollars more expensive for foreign investors.

Inflation Data Fails to Provide Support

Despite signs of cooling inflation, silver prices failed to gain traction. The Personal Consumption Expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation, showed a modest increase of 2.4%, below market expectations.

While lower inflation could typically boost silver prices by reducing the urgency for higher interest rates, the Fed’s commitment to maintaining a restrictive policy stance dampened investor optimism.

Key Support Levels Breached

Technical factors also played a role in silver’s decline. Early in the week, silver prices fell below the $30.44 pivot, triggering a wave of selling pressure. The subsequent break below $29.64, a critical support level, exacerbated the bearish sentiment.

Silver briefly touched a low of $28.75 before rebounding slightly, but the breakdown below these important levels reflects growing uncertainty in the market.

What’s Next for Silver? Key Drivers to Watch

Jobs and Inflation Data

As traders digest the Federal Reserve’s hawkish signals, attention is now turning to upcoming jobs and inflation reports. A strong labor market and sticky inflation could reinforce the Fed’s restrictive policies, keeping silver under pressure. Conversely, signs of economic weakness may provide a lifeline for the metal.

Industrial Demand Trends

Silver is widely used in industrial applications, from solar panels to electronics. Any slowdown in global industrial activity, particularly in China, could weigh on demand for silver. On the flip side, increased adoption of green technologies could bolster demand in the long term.

Dollar and Yield Dynamics

The performance of the U.S. dollar and Treasury yields will continue to be critical for silver prices. A weaker dollar or declining yields could improve silver’s outlook, while further strength in these areas would likely prolong the bearish trend.

Silver Price Predictions: Bearish or Bullish?

Short-Term Outlook

In the short term, silver prices are likely to remain under pressure as the market grapples with hawkish Fed signals and economic data. The key resistance level at $30.44 will need to be reclaimed for silver to signal a potential reversal.

Long-Term Perspective

Despite the current bearish sentiment, silver’s long-term fundamentals remain strong, particularly due to its role in renewable energy technologies. If inflation continues to cool and the Fed shifts toward a more dovish stance, silver could see a substantial recovery in 2025 and beyond.

Can Silver Recover?

Silver’s recent decline highlights the challenges facing precious metals in an environment of rising yields and a stronger dollar. However, with inflation showing signs of cooling and the Fed nearing the end of its tightening cycle, there may be opportunities for silver to recover in the coming months.

For now, traders should closely monitor economic data, particularly jobs reports, inflation metrics, and industrial demand trends, as these will likely determine the metal’s near-term trajectory.

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