Stronger Fed rate hike bets drive silver down 5% to three-month low

• Silver comes under heavy selling pressure on Thursday, dropping 5% as the prospect of monetary policy staying restrictive for longer weighs on precious metals.
• Inflation worries mount as escalating Middle East tensions drive Oil prices higher.
• While markets anticipate no change in Fed interest rates next week, they expect a further hike in December.

Heavy selling continues to weigh on Silver (XAG/USD) on Thursday as inflation worries bolster expectations of a prolonged period of elevated Federal Reserve (Fed) interest rates. A recovery in the US Dollar (USD) is adding to the pressure. At the time of writing, the metal is trading around $55.05, down 5.00% on the day, having touched a three-month low of $55.01.

Against the backdrop of Silver's slide, intensifying geopolitical tensions in the Middle East are fuelling fears of disruptions to global energy supplies and a fresh build-up in inflationary pressures.

The New York Times reports that plans for renewed military strikes against Iran after the US midterm elections have reportedly been prepared by the United States (US) and Israel. The country's energy infrastructure could potentially be targeted.

Fresh attacks on the Shaybah Oil field and King Fahd International Airport have been reported as tensions between Saudi Arabia and the Houthis intensify. Underscoring the worsening regional security situation, the US State Department has also directed non-emergency government employees and their families to depart Saudi Arabia.

Oil prices are being lifted by these developments. After approaching the $100 mark, West Texas Intermediate (WTI) crude is rebounding towards $98.65, up nearly 2% on Thursday.

The monetary policy outlook is becoming more complicated as rising energy costs stoke fears that inflation will remain persistent. To prevent consumer price inflation from accelerating again, central banks may have to keep interest rates restrictive for longer.

For Silver, which pays no interest income, these conditions are particularly adverse. As borrowing costs and government bond yields rise, holding non-yielding precious metals carries a higher opportunity cost, making them less attractive relative to interest-bearing assets.

Next week's Fed monetary policy meeting is now in focus for investors. Following a 25 basis points (bps) increase in borrowing costs in September, the US central bank is widely anticipated to keep interest rates steady. Expectations of a further increase in December are nevertheless gathering strength. Markets price in an 89% probability of another rate hike before year-end, according to the CME FedWatch Tool.

The US Dollar is drawing support from these hawkish rate expectations. This raises the cost of Silver for investors using other currencies, placing the precious metal under additional pressure.

Can Silver hold support? Technical analysis

A near-term bearish bias persists on the four-hour chart, where XAG/USD is trading at $55.17, well beneath the 100-period simple moving average (SMA) of $59.13 and the 200-period SMA of $61.75. Horizontal support at $54.77 lies just below the current price. With the Relative Strength Index (14) moving into oversold territory near 29, downside momentum appears stretched, although this has yet to overturn the prevailing bearish structure.

A breach of $54.77 on the downside would leave scope for further losses and preserve the bearish bias despite the oversold RSI reading. Any recovery would first encounter resistance at $56.60, ahead of the recent horizontal hurdle at $58.00. Higher up, the 100-period SMA at $59.13 and the 200-period SMA at $61.75 strengthen a wider supply zone.

(The technical analysis of this story was written with the help of an AI tool. Know more.)