Silver Price Analysis: XAG/USD subdued near $25.00 as crucial US inflation data looms

• Spot silver is trading subdued in the $25.00 area in the run up to US CPI data at 1330BST.
• Though an upside surprise could spur USD/US yield upside, it may also spur demand for inflation protection.
• Thus, XAG/USD’s reaction function to the upcoming data isn’t quite clear and traders should prepare for volatility.

Spot silver (XAG/USD) prices are unsurprisingly trading in a subdued fashion near the $25.00 per troy ounce level in the run-up to the release of key March US Consumer Price Inflation (CPI) data at 1330BST. Economists expect the headline rate of YoY CPI to hit 8.4%, a four-decade high, thus exerting further pressure on the Fed to get on with its monetary tightening plans.

Typically, when US economic data encourages the Fed to pursue a more hawkish policy path, this would be bad for spot silver via 1) a stronger US dollar which makes spot silver more expensive for international buyers and 2) higher US yields, which increase the “opportunity cost” of holding non-yielding assets such as silver.

However, given the backdrop of exceptionally high inflation in the US and around the world, and given uncertainties regarding how long this inflation will last amid the ongoing Russo-Ukraine war and lockdowns in China, demand for inflation protection remains elevated. Precious metals have typically been seen as the “ultimate hedge” against inflation thanks to their status as financial commodities that in the past formed a great part of the world’s monetary base.

That means that it's not quite clear how silver would react to an upside US inflation surprise and traders should be aware that any such reaction could go either way. To the downside, traders will be watching the 21-Day Moving Average in the $24.90s which has already offered support on Tuesday, ahead of the 50DMA in the $24.50s just below it. To the upside, XAG/USD traders will be watching support in the form of Monday’s highs just under $25.40.