Silver tracks Gold price higher on dovish Fed

• Silver shoots to test the $23.00s as markets adjust to a less hawkish Fed.
• A dovish 25BP rate hike sent the US Dollar and yields lower.

The Silver price shot higher on Wednesday following the Federal Reserve´s dovish interest rate decision when the central bank announced its 25 bp rate hike.  The decision was mostly expected while the Federal Open Market Committee Statement flagged “some additional policy firming” with the dot plot median pointing to one more hike. 

Before today´s Federal Reserve event, markets were pricing in a year-end target rate of 4.36%. This has dropped in volatile reactions to the statement to 4.26%. At the time of writing, US 2-year Treasury yields are down to 4.77%, dropping from 4.259% on the day to print a low of 3.958%. Consequently, the US Dollar index, DXY, fell to a low of 102.065 from a high of 103.265 and the bird took off. 

Fed event main points

• The median forecast shows rates at 5.1% end-2023, 4.3% end-2024.
• 'Some additional policy firming may be appropriate.'
• FOMC deletes reference to ongoing increases.
• US banks are sound, resilient but events to weigh on growth.
• Likely to see tighter credit conditions that weigh on economic activity, hiring and inflation.

Meanwhile, Fed´s chairman Jerome Powell spoke to the press:

• Powell speech: Isolated banking problems can threaten banking system if left unaddressed

• Powell speech: Recent banking events will result in tighter credit conditions
• Powell speech: Before banking stress, thought we would have to raise terminal rate
• Powell speech: Tightening in credit conditions may mean monetary tightening has less work to do
• ´´If we need to raise rates higher we will, for now we see likely hood of credit tightening.´´

In summary, analysts at RBC Economics explained that ´´today’s move was in line with consensus and market pricing but much less of a foregone conclusion than typical Fed decisions.´´

the analysts explained that ´´two weeks ago the market was leaning toward a 50 bp hike with Chair Powell having opened the door to a larger move if the totality of incoming data warranted it. One week ago there were doubts that the Fed would raise rates at all amid turmoil in the banking sector. The market finally coalesced around a 25 bp increase, though there were some odds and several calls for the Fed to take a pass.´´

The analysts expected a hike but wouldn’t have argued with the Fed waiting six weeks until its next meeting to better assess the impact of recent events and any further risks to the banking sector. ´´Today’s dovish tone and guidance, at least, suggests policymakers are now more mindful of the risks of over-tightening. And if today’s hike isn’t the last, we’re getting very close to the terminal,´´ the analysts concluded. 

Meanwhile, with respect to Silver prices, analysts at TD Securities said, ´´ CTA trend followers are relatively under positioned in silver markets, where a break above $24.00/oz would spark large-scale buying activity.´´