Silver Price Analysis: XAG/USD continues rebound from $22.00 amid favourable yield backdrop, cautious ahead of Fed

• Spot silver continued to rise on Monday amid risk-off and a favourable yield environment.
• The main event of the week will be the Fed and their hawkishness might hurt precious metals.

Spot silver (XAG/USD) prices are higher on Monday, building on last Friday’s rebound from just under $22.00 per troy ounce to current levels close to current levels around $22.30 amid a favourable yield environment. To the upside, XAG/USD faces resistance in the $22.60 area in the form of last week’s highs, whilst to the downside, there is support around $21.80. A bullish break would open the door to a move towards the $23.00 level, which has been an important balance area in recent months. A bearish break would bring the $21.50 level in focus, which coincides roughly with September’s low.

Driving the day

US yields have been falling gradually for most of the session, particularly at the long end of the curve, amid a risk-off market feel that is favouring safe havens assets like US bonds (thus suppressing yields) as risk assets (stocks, commodities, risk-sensitive currencies) decline. There is a sense of caution in the market ahead of a week jam-packed with important central bank events, the most important of which is Wednesday’s Fed policy announcement, and G10 data releases.

Meanwhile, worries about the impact of Omicron on the near-term economic outlook remain elevated after UK PM Boris Johnson sounded the alarm about a coming “tidal wave” of infections in the UK over the weekend. US 10-year yields are down about 6bps and back under 1.45%, still well below pre-Omicron emergence levels (near 1.70%), while US 10-year TIPS yields are down about 3bps on the day and remain under -1.0%. The dollar is a little firmer, which some market commentators have attributed to pre-FOMC meeting positioning (on expectations of a hawkish outcome), though the dominant driver of markets on Monday remains risk appetite.

In terms of the outlook for silver this week, if risk appetite continues to be the main driver (perhaps on more bad Omicron news), then the prospect for further upside is good. However, if central banks and the theme of their reaction functions to economic conditions is the main driver, then things look less positive for precious metals. There is a bonanza G10 and EM central banks this week, but the most important of which is the Fed on Wednesday and they are going to pivot hawkishly – recall that Chairman Jerome Powell indicated this in his Congressional testimony earlier in the month when he said it might be appropriate to hasten the pace of QE tapering and to drop the term “transitory” to describe inflation.

For precious metals to see a sustained rebound, there is going to have to be a notably dovish change in tone from the Fed that weighs on short-end and real yields and causes inflation bets to rise. With inflation at 6.8%, as the latest Consumer Price Inflation report revealed last Friday and with the Fed now framing inflation as a greater threat to the labour market as opposed to pre-emptive policy tightening, such a shift seems highly unlikely.