Silver bounces at support in $25.80s, but technical break lower remains on the cards

• Spot silver prices have traded with a predominantly negative bias so far this Thursday.
• Nonetheless, strong support has been found in the $25.80 region, though technicals point at the risk of a bearish breakout.
• Rising US government bond yields and a stronger dollar have been weighing on precious metals.

Spot silver prices (XAG/USD) have traded with a predominantly negative bias so far this Thursday, weighed by rising US bond yields and a pick up in the US dollar from post-FOMC lows. As such, most of spot silver’s post-FOMC gains have now faded and the precious metal has long slipped back from Asia Pacific session highs above the $26.50 level. However, spot prices found solid support in $25.80s, where support in the form of this week’s lows and an uptrend linking the 5 and 12 March lows resides. Spot prices have now bounced back above the $26.00 level.

Thursday’s price action suggests that spot silver prices are likely to continue to consolidate within the bounds of a bearish flag; the above-noted uptrend support forms the bottom of the flag, while an uptrend linking the 4, 11 and 18 March highs forms the top – such a flag may be subject to a breakout to the downside, which a move below support in the $25.80 region would confirm. This would open the door to a gradual move back towards monthly lows around the $25.00 level.

Driving the day

As noted, surging US government bond yields are the primary factor pushing silver prices lower on Thursday; nominal US 10-year yields have surged more than 11bps on the day to above 1.75%, fresh cycle highs, with the bulk of the move being driven by a sharp rise in real yields (10-year TIPS yields are up nearly 9bps on the day to well above -0.6%). Note that higher yields tend to weigh on precious metals markets given their historic negative relationship.

Elsewhere, mixed US data (there was a huge beat on expectations in the latest Philly Fed survey for the month of March, but Weekly Jobless Claims data was not as good as expected) has not had a meaningful impact on the market’s broader appetite for risk nor on silver or gold markets. Looking ahead, there is unlikely to be much by way of further fundamental catalysts for the remainder or Thursday’s session. In terms of what is in store for Friday; the main focus of markets will be the outcome of US/China talks in Alaska – this is unlikely to matter too much for silver, which is likely to predominantly remain focused on bond market price action for the rest of the week.

Why are yields rising?

In terms of why bond yields are surging this morning, the move is likely being driven by shifting narratives around the outlook for the US economy, US inflation and Fed policy as trader chew the fat on Wednesday’s FOMC meeting – the US economy is expected to see a roaring recovery over the next three years (a view with which the Fed agrees, just see their new super bullish economic forecasts) and inflation is expected to pick up strongly. But despite the above, the Fed is signalling that it is going to stay super dovish, given its new emphasis on reaching full employment and average inflation targeting policy.

It seems as though markets face two scenarios; 1) the US economy running hot but within the Fed’s expectations, so they maintain very easy monetary policy, leading in turn to higher inflation, which itself lifts bond yields (via higher inflation expectations) or 2) the US economy running hot and perhaps pushing inflation higher than the Fed expected, leading to the Fed panicking and tightening monetary policy earlier than markets currently price, which in turn lifts bond yields via a rise in real yields as a result of the Fed tightening financing conditions. In either scenario, the path for yields is higher.