Silver slides 50 cents to below $25.50, though strong US data acts in support

• Spot silver prices have slumped on the final trading day of the week as traders appear to take risk off the table ahead of the weekend.
• Prices were supported in recent trade, however, as strong US data increased the case for the reflation trade.

Spot silver prices (XAG/USD) have slumped on the final trading day of the week as traders appear to take risk off the table ahead of the weekend; spot prices have dropped from Asia Pacific levels of just below the 21-day moving average at close to the $26.00 level to just above the $25.00 level, with the psychological big figure and the 50-day moving average just below it offering support to the price action as of right now.

Prices were supported in recent trade, however, as strong US data increased the case for the reflation trade, which typically benefits precious metals like silver. On the day, XAG/USD is down around 2% or around 50 cents and currently trades just below $25.50.

Driving the day

USD been on the front foot for much of the session thus far, with the Dollar Index rising from early European session lows under 90.10 to the upper 90.20s, weighing on precious metal markets which typically have a negative correlation to the buck. The US is being driven higher by a broadly risk-off market tone; stocks, crude oil, other industrial commodities and risk-sensitive currencies are all lower while bonds are higher and safe haven USD, CHF and JPY lead in the G10, alongside the euro.

Market participants seem keen to “take some risk off the table” ahead of a weekend which may well bring further bad news on the coronavirus front; China reported another 103 Covid-19 cases and with Lunar New Year only a few weeks away, fears are growing that the holiday might become a “super spreading” event that might result in the country having to implement broader lockdowns than are already in place, denting economic activity in the world’s second-largest economy. Meanwhile, new restrictions have come into force in Hong Kong and the UK government is talking about how, despite the country’s solid progress in mass vaccinations (over 5M have now been jabbed), lockdowns may well persist into the summer.

That said, risk appetite has been given a minor boost in recent trade following much stronger than anticipated preliminary January US Markit PMI numbers; the manufacturing index hit a series record high at 59.1 (versus expectations for 56.5) and the services index came in at 57.5 (versus expectations for a drop to 53.4). According to Markit, manufacturers registered the sharpest rise in selling prices since 2008 and the rate of input price inflation was the fastest on record (since 2009). The indices were also driven higher by supply shortages.

The data suggests a more robust than expected start to the year to the US economy and may even raise hopes that the US economy might avoid recession in Q1 2021. That, combined with higher reported price pressures has seemingly given a boost to the reflation trade and stocks and commodities are above lows, though still lower on the day for the most part.