Silver Faces New Threats as Fed Stance Shifts

The growing comfort of the US Federal Reserve with the prospect of rising interest rates has sent the dollar surging higher, bolstered in large part by the inflationary-positive fiscal policies being proposed by the Trump Administration. Although silver prices have not been as responsive to the development as gold when it comes to rate hike sensitivity and correlation to movements in the US dollar, the upside momentum in the US currency does highlight the potential for silver to play catch down.

As inflationary pressures continue to build, there is a growing sense of hawkishness prevailing among key Federal Reserve officials ahead of the next FOMC Meeting being held on March 14th and 15th.Despite numerous data points that could conceivably derail this sentiment over the next few weeks, should more details unfold on the fiscal policy front, the Fed might well have found itself behind the curve when it comes to interest rates, beckoning a quicker pace of tightening.Nevertheless, rising inflation without action could also be a positive development for silver, especially if the Fed defers from acting sooner.

Hawkish Leanings Increasingly Evident

Within the span of just one day, market participants are increasingly pricing-in the probability of the US Central Bank hiking rates during the upcoming Open Market Committee decision.After multiple Fed officials noted that March would be a “live” meeting over the last few weeks, comments from four policymakers on Tuesday echoed this viewpoint.Remarks from New York Fed President William Dudley, San Francisco Fed President John Williams, Philadelphia Fed President Patrick Harker, and Dallas Fed President Robert Kaplan during Tuesday speeches all underlined the more hawkish tone.Most of these members believe that the high degree of accommodation should be removed after aggressively low rates set during the last financial crisis.

While not all members are on board with a near-term rate hike, as evidenced by St. Louis Fed President James Bullard’s position on reducing the balance sheet first, the biggest confirmation of said sentiment could be disseminated by Fed Chair Janet Yellen during her speech on Friday.Markets are nevertheless reacting to the building case for rate hikes, with the probability of March action rising to 66.40% on Wednesday from 33.60% on Tuesday according to the CME Group’s FedWatch tool which tracks Fed Funds futures speculation.Adding to the Fed’s bullish rate case were the Personal Consumption Expenditures data released earlier on Tuesday’s session.With headline and core PCE inflation trending just south of the Federal Reserve’s 2.00% target, all the stars are aligning for imminent action.

Even though the second reading of fourth quarter GDP failed to meet expectations, it remained on hold at 1.90%, corroborating Dudley’s viewpoint that the trajectory of economic activity remains above trend. The main consideration looking ahead is whether or not job creation cooperates and meets the demands set forth by the Fed’s dual mandate. Although rising inflation is typically a positive development for precious metals and silver, there are other factors that impact silver’s price momentum. For one, there is a major imbalance between mined silver and demand for the metal considering it also has practical industrial uses. Miners are also not investing as much in new mines owing to the low price of silver, constraining supply even further. Nevertheless, the question remains as to whether the Fed or the commodity’s fundamentals will have a bigger impact on the outlook.

Silver Prices Recover from Earlier Losses

After the kneejerk reaction lower in silver prices to the gains in the US dollar, the precious metal has since been on the climb, recovering from all of Tuesday’s losses while trending back towards multi-month highs reached last Friday. Looking at the correlation coefficient, a surprising development has transpired over the last few weeks. Unlike the historically inverse correlation between gold and the US dollar, silver has been displaying a positive relationship with the greenback over the last two weeks. At present, the correlation coefficient stands at 0.7730, indicating that gains in the dollar may actually be accompanied by further upside in silver prices.

Even though monetary policy could be negative for silver from a fundamental perspective, technically, prices remain firmly in an upward trend. Besides swinging higher in an upward trending equidistant channel, the moving averages remain supportive of further upside. After crossing the 200-day moving average to the upside, the level is now acting as support and surprisingly coincides with the lower channel line. After prices retreated from the upper channel line, they may correct even further from current levels. With momentum indicators like the Stochastic Oscillator and Relative Strength Index suggesting that prices may be slightly overbought, a near-term pullback may be in order. Should a trend continuation occur, the level to watch after resistance at $18.500 and upper channel line is $18.720.

What Binary Options Traders Should Watch For

While gold and silver may traditionally move in tandem, this correlation is gradually showing signs of breaking down. A more hawkish outlook for monetary policy as not been enough to persuade silver bulls that the ongoing upward trend is worth abandoning. However, by the same token, higher interest rates would be a net negative for the silver outlook despite rising inflation and the prevailing supply-demand imbalance. The main events to watch for over the coming days and weeks are speeches from key Fed officials, the nonfarm payroll figure due next week, and finally the culmination of months of data with the mid-month FOMC Meeting. Should monetary policy continue to normalize, silver gains may have run their course despite the upside potential relative to gold.