Silver Price Analysis: XAG/USD holding above $22.50 for now, but Fed threat looms

Though prices have been able to fend off a retest of Monday lows in the $22.12 area and annual lows just under the $22.00 per troy ounce level for now and still trade to the north of the $22.50 mark, spot silver (XAG/USD) continues to trade with a negative bias on Tuesday as traders brace for monetary tightening from the Fed later this week and for a barrage of tier one US data released.

At current levels in the $22.50s, XAG/USD is trading with losses of about 0.4% on Tuesday, taking its losses since the start of the week to about 1.0% and its losses since mid-April highs above $26.00 to roughly 14%. Silver’s run of poor recent form is not surprising given the macro backdrop which has seen the US dollar and US yields advance to multi-year highs.

The DXY, while a tad lower on Tuesday, continues to trade in the 103.00s, not far from multi-year highs printed last week near 104.00 and up from around 100 as recently as mid-April. Meanwhile, US 10-year yields continue to flirt with multi-year highs around the 3.0% level, up from under 2.50% at the start of April.

A stronger US dollar makes USD-denominated commodities like XAG/USD more expensive for international buyers, while higher yields raise the opportunity cost of holding non-yielding, hence the negative correlation of both to silver. Macro strategists are warning that recent strength in the buck and buoyancy in US yields may continue this week, with the Fed expected to lift interest rates by 50 bps on Wednesday, signal rates hitting roughly 2.5% by the year’s end and announce quantitative tightening plans.

Some have said that with so much hawkishness from the Fed already priced into markets, risks are tilted towards Fed Chair Jerome Powell not living up to the hype, and a subsequently dovish market reaction. While that might be the case, any XAG/USD rebound is likely to be short-lived, with a recovery back above the 200-Day Moving Average near $23.80 not looking likely. Indeed, as long as the Fed seems intent with pressing ahead with rapid monetary tightening, risks seem tilted towards the precious metal testing Q4 2021 lows in the mid-$21.00s.