Silver Price Analysis: XAG/USD rallies above key $22.60 resistance area as Powell offers few surprises

• Silver has rallied alongside other asset classes recently hit by Fed hawkishness after Powell’s remarks didn’t offer any surprises.
• XAG/USD has rallied to the $22.75 area, clearing its 21DMA and key short-term resistance in the $22.60s.

The fact that Fed Chair Jerome Powell didn’t add any further fuel to the fire regarding the market’s recent hawkish repricing of Fed policy expectations seems to have been taken as a green light for some reversal of recent moves. Powell’s remarks were very much in line with the contents of last week’s minutes from the December 2021 meeting, with Powell endorsing the need for the Fed to lift interest rates and begin the process of quantitative tightening in 2022. In response to his remarks made before the Senate Banking Committee at his renomination hearing, US equity markets are enjoying a tech/growth-stock led rally, US yields are falling and the US dollar has been coming under pressure.

Given their negative correlation to the buck and real yields, the net result for precious metals markets has been positive, with spot silver (XAG/USD) prices currently up more than 1.0% on the day. Spot prices had been struggling to get back above their 21-day moving average at $22.60 in the run-up to Powell’s testimony but have since broken higher to the $22.75 area. In doing so, spot silver has also managed to clear key resistance in the $22.60s in the form of recent lows from the beginning of last week and the week prior.

Some strategists had been warnings that the recent moves observed in US real yields had been overdone and Tuesday’s retracement is overdue. To recap, US 10-year TIPS yields nearly hit -0.70% on Monday, up from -1.1% at the start of the year. On Tuesday, it has pulled back to under -0.80%, with an even larger move lower being seen on the day in 5-year TIPS yields. Lower real yields lowers the opportunity cost of holding non-yielding precious metals, hence the negative correlation. But taking a longer-term view, it does seem likely that as the Fed unwinds stimulus via rate hikes and quantitative easing throughout the duration of the year, risks are tilted to the upside. That could mean that traders continue to view XAG/USD as a sell on rallies.

That would especially be the case if the US dollar, which has weakened in wake of Powell’s remarks likely as a result of position adjustment, starts strengthening broadly. Speculators have built up heavily long-dollar positions in recent weeks, so some further dollar downside as some of the weaker hands are flushed out may see dollar downside continue. But any dollar/real yields weakness fuelled rally back towards recent highs in the $23.50 area may be viewed as an attractive short-entry by the longer-term silver bears.