Silver price (XAG/USD) has been on a downward trend for the past two days, after failing to break above the $26.40 resistance level on Tuesday. The precious metal is currently trading near the $25.30 support zone, which is a critical area for the bulls to defend.
The $25.30 level coincides with the 21-day moving average (MA) and an ascending trend line that has been supporting the silver price since early March. A break below this confluence of support could signal a bearish reversal and open the door for more losses towards the $24.50 and $23.50 levels.
On the other hand, if the silver price manages to bounce off the $25.30 support, it could resume its uptrend and challenge the $26.40 resistance again. A clear break above this level could pave the way for a test of the $27 and $28 levels, which are the next major hurdles for the bulls.
The silver price is influenced by various factors, such as supply and demand, market sentiment, economic data, geopolitical tensions, and the performance of other assets, especially gold. Silver often follows the direction of gold, as both metals are considered safe-haven assets during times of uncertainty and volatility.
However, silver also has industrial uses, which makes it more sensitive to changes in economic activity and consumer demand. Silver is widely used in electronics, solar panels, medical equipment, and jewelry, among other sectors. Therefore, silver price can benefit from positive signs of economic recovery and growth, as well as from rising inflation expectations.
The silver price is also affected by the movements of the US dollar, as it is priced in the greenback. A weaker dollar makes silver cheaper for holders of other currencies, boosting its demand and price. Conversely, a stronger dollar makes silver more expensive and less attractive for foreign buyers, weighing on its price.
The US dollar index (DXY), which measures the strength of the dollar against a basket of six major currencies, has been on a downtrend since March 31, when it reached a four-month high of 93.43. The DXY has fallen to 90.88 as of May 5, 2023, as the market sentiment improved and the US Treasury yields retreated from their recent highs.
The silver price has also been influenced by the actions and statements of the Federal Reserve (Fed), which is the central bank of the US. The Fed sets the monetary policy for the US economy, which affects the interest rates and the money supply. The Fed’s policy decisions can have a significant impact on the value of the dollar and the demand for silver.
The Fed has maintained an accommodative monetary policy stance since the onset of the Covid-19 pandemic, keeping its benchmark interest rate near zero and buying $120 billion worth of bonds per month to support the economy and financial markets. The Fed has also signaled that it will not raise interest rates or taper its bond purchases until it sees substantial progress towards its goals of maximum employment and stable inflation.
The Fed’s dovish stance has been supportive for silver price, as it lowers the opportunity cost of holding non-yielding assets like precious metals. It also increases the inflationary pressures in the economy, which erodes the purchasing power of fiat currencies and boosts the appeal of hard assets like silver.
However, some market participants have been speculating that the Fed may have to tighten its policy sooner than expected, given the strong recovery of the US economy and the rising inflation expectations. The US gross domestic product (GDP) grew by 6.4% in the first quarter of 2023, according to an advance estimate by the Bureau of Economic Analysis (BEA). The US consumer price index (CPI) rose by 2.6% year-over-year in March 2023, according to data from
the Bureau of Labor Statistics (BLS).
These figures have raised concerns that the Fed may be behind the curve in addressing inflation risks and may have to hike interest rates or reduce its bond purchases sooner than anticipated. This scenario could weigh on the silver price, as it would strengthen the dollar and increase the yield on US Treasury bonds, which are considered safe-haven assets that compete with precious metals.
The Fed Chair Jerome Powell has repeatedly dismissed these concerns, saying that the current inflation pressures are transitory and that the Fed will not react to short-term data fluctuations. Powell has also stressed that the Fed will communicate its policy changes well in advance
