Silver Price Analysis: XAG/USD dips back to $23.00 as markets mull prospect for faster Fed tightening post-hot CPI

• Spot silver dipped back towards $23.00 on Friday, a second day of losses after Thursday’s hot US CPI.
• The data prompted a further hawkish shift in Fed tightening bets and a surge in US bond yields.
• Traders also cited hawkish comments from Fed’s Bullard as weighing on silver, though some think markets might be over-interpreting his remarks.

Spot silver’s (XAG/USD) sharp-post hot US Consumer Price Inflation (CPI) data reversal from highs in the upper $23.00s per troy ounce continued on Friday, with spot prices dropping back to test the $23.00 level. At one point, the precious metal dipped as low as the $22.80s, but has since bounced to trade near the big figure, down about 0.7% or roughly 15 cents on the day. Thursday’s hot CPI, which saw the headline YoY rate of US inflation hit 7.5%, its highest since 1982, sparked a further hawkish shift in market-based measures of expectations for Fed tightening in 2022.

This shift was exaccerbated by hawkish remarks from St Louis Fed President James Bullard, who after the data on Thursday remarked that he wanted to see 100bps of tightening by the start of H2 2022. According to US money market-implied probability, a 50bps rate hike in March is now strongly the base case, while 175bps of tightening are expected by end-2022. Higher interest rates damped the appeal of non-yielding assets such as silver, hence its no surprise to see prices move lower over the past two days.

But some analysts think that markets have gone too far in pricing near-term Fed tightening and placed too much weight on Bullard’s remarks. In a recently published article, CNBC’s Steve Liesman articulated this viewpoint, arguing that, despite hot inflation, the Fed is likely to take a measured approach to rate hikes (i.e. 25bps at a time). He cited remarks from Fed policymakers Mary Daly, Thomas Barkin and Raphael Bostic in wake of the inflation data which push-back against the idea of a 50bps move.

The dollar’s failure to rebound substantially this week may be a reflection of fears that the Fed might not live up to the market’s very hawkish expectations for policy tightening. The DXY remains stuck under 96.00, helping XAG/USD remain on course for a weekly gain of about 2.5%, despite the sharp rise in yields across the US curve this week. Dollar weakness/silver resilience may also reflect recent flattening of the US yield curve, which is suggestive of a weakening economic outlook. The 2-year 10-year spread recently fell under 40bps for the first time in over 18 months.