Silver (XAG) Forecast: Firm Dollar and Rising Yields Cap Gains

Silver Struggles for Momentum as Dollar Strengthens on Fed Rate Uncertainty

Silver prices edged lower on Friday, failing to build on Thursday’s upside breakout. The metal reached a high of $31.74 in the previous session, just below the key resistance zone of $31.81 to $32.33, but struggled to maintain bullish momentum. Friday’s trading range remained inside Thursday’s session, signaling investor indecision and potential volatility ahead.

Minor support for silver sits at $30.72, with major support at $30.53. Notably, traders showed little reaction to gold’s record-breaking rally and the latest U.S. Personal Consumption Expenditures (PCE) inflation data, suggesting a market more focused on broader macroeconomic signals.

Dollar Gains on Sticky Inflation and Fed Rate Outlook

The U.S. dollar strengthened following the PCE inflation report, which cast further doubt on the timing of the Federal Reserve’s first rate cut. The U.S. Dollar Index (DXY) climbed to 108.295, up 0.11%, reaching a session high of 108.366. Rising Treasury yields reinforced dollar support as traders adjusted their expectations for Fed policy.

The December PCE index, the Fed’s preferred inflation gauge, rose 0.3% month-over-month and 2.6% annually, slightly above November’s 2.4%. Core PCE, which strips out food and energy, increased 2.8% on a yearly basis, signaling inflation remains stubbornly above the Fed’s 2% target.

Treasury Yields Tick Higher as Rate-Cut Bets Fade

Following the inflation report, Treasury yields edged higher, reflecting market concerns that the Fed may delay rate cuts longer than expected. The 10-year yield rose to 4.533%, up 2.1 basis points, while the 2-year yield gained 2 basis points to 4.216%.

This marked a reversal from Thursday’s move lower, which was driven by a weaker-than-expected fourth-quarter GDP report showing 2.3% annualized growth, below the 2.5% forecast. The renewed focus on inflation data and hawkish Fed rhetoric sent yields back up, reinforcing dollar strength.

Fed Officials Signal Patience, Pressuring Silver

Fed policymakers continued to stress the need for more progress on inflation before easing policy. Chair Jerome Powell reiterated that rate cuts would require either “real progress” on inflation or signs of labor market weakness. Fed Governor Michelle Bowman reinforced this stance, pushing back on expectations for a near-term policy shift.

Traders have now priced in a 70% probability that the first Fed rate cut will come in June, with a second cut likely delayed until October. The repricing of rate expectations has kept the dollar firm and weighed on silver’s ability to sustain gains.

Market Forecast: Silver Faces Headwinds from Dollar Strength

With the Fed maintaining a cautious stance and inflation showing persistence, the dollar is likely to stay supported in the near term. This could limit silver’s upside, especially if Treasury yields continue to rise.

Key resistance at $31.81-$32.33 remains a barrier for silver bulls, while a drop below $30.53 could trigger a deeper pullback. The next catalysts for silver will be upcoming employment and inflation reports, as well as any shifts in Fed rhetoric. Until markets receive clearer signals on disinflation, silver may struggle to gain traction against a firm dollar.

More Information in our Economic Calendar.