Silver remains supported north of $26.00 level, eyes possible pennant breakout

Spot silver (XAG/USD) prices continue to gradually ease from Monday Asia Pacific session highs close to $26.80, hitting lows during the early part of Tuesday European morning trade at bang on the $26.00 level. The psychological round level has held for now; XAG/USD is currently consolidating just above $26.00 and trades with losses of about 0.5% or over 10 cents on the day.

USD slide picks up momentum, supporting precious metals

The US Dollar Index (DXY) recently slid below the 90.00 level and beyond Monday’s 89.98 low to hit its lowest levels since 18 December, the index now nursing losses of just over 0.4% on the day or just under 40 points. Given the negative correlation between the dollar and precious metals, USD weakness should keep a floor under the likes of XAG/USD.

In terms of why USD is on the back foot, risk appetite! The S&P 500, Dow Jones Industrial Average and Nasdaq Composite indices all just opened at all-time highs, as the major US indices continue to derive impetus in wake of US President Donald Trump’s signing of the $900B Covid-19 aid package and $1.5T omnibus spending package into law earlier in the week and the fact that there is still some uncertainty over whether or not Congress might also pass an additional $1400 in direct payments to each American, bringing the total stimulus cheque amount up to $2000.

Trump and the Democrats both support this and the Democrat-controlled House of Representatives has already voted in favour of the bill. It remains unclear whether the Senate will, with prominent Republicans against further aid, although enough Republicans might feel the pressure to vote in favour of more stimulus in order to please the public as the 5 January Georgia Senate runoff elections (that will decide whether the Democrats or Republicans control the White House) approaches. Should this additional aid pass, it is likely to be seen as a further positive for risk appetite and might well drive US stocks higher and the US dollar lower.

This on the face of it might be seen as a precious metal positive. But signals from the bond market will be important to watch; if the $1400 in additional direct payments to each American is agreed upon, then US bond yields might see further upside (on Tuesday the 10-year yield is up 1bps to 0.943%). Analysts are on notice for a move above 1.0% that has remained elusive thus far in Q4 2020.

If rising nominal yields results in real yields rising, then this is likely to be a negative for precious metals markets (the better the inflation-adjusted return on investing in bonds, the less of an incentive to hold non-yielding precious metals). At present, the US 10-year TIPS yield is at -1.04%, close to Summer lows of around -1.1%.

Looking ahead to the remainder of the week, what happens with US fiscal stimulus is set to continue to be the preeminent driver of both the US dollar and likely also precious metals markets.

XAG/USD consolidating within pennant

XAG/USD appears to be consolidating within a pennant structure; to the upside, a downtrend linking the 21 December and this week’s highs is capping the price action and to the downside an uptrend linking the 14, 22, 23 and 24 December lows is supporting the price action. An upside break, which seems more likely than not if USD continues to fall and DXY hits fresh annual lows beneath 89.70, would need to see a push above $26.50 and beyond weekly highs just under $26.80. This would open the door to a move higher towards last Monday’s high just under $24.50.

Meanwhile, a downside break would need to see a push below the $26.00 level and around the $25.80 mark, and would open up the door to a move lower towards $25.00 and the precious metal’s 21 and 50-day moving averages just below it at $24.71 and $24.42 respectively.

XAG/USD four hour chart