Silver reclaims $65, gold struggles below $4,300

Silver is up 1.85% to near $65.00 during the European trading session on Friday. XAGUSD strengthened as the rally in the US dollar and US Treasury yields appears to have hit a pause.

The DXY Dollar Index, which gauges the greenback’s value against six major currencies, traded 0.2% to near 101.05. 10-year US Treasury Yields have corrected from the 19-year high of 5.22% to near 5.15%.

Theoretically, a corrective move in yields on interest-bearing assets results in an improvement in the appeal of non-yielding assets, such as silver. While a lower dollar makes XAGUSD a favorable risk-reward bet for investors.

However, the outlook of the dollar and US Treasury yields appear to be bullish amid the Federal Reserve’s higher-for-longer interest rates narrative, with officials warning of high inflation and expressing economic resilience.

Strategists at Brown Brothers Harriman observed that the USD is “powering forward against most major currencies,” with a hawkish Fed stance and widening US economic growth outperformance suggesting the dollar “can keep flexing its muscle.”

They pointed to comments from Fed Governor Michael Barr, who warned that “further policy adjustments are likely to be needed to ensure inflation comes down to target in a timely fashion,” reinforcing expectations that policy may need to tighten further.

BBH also highlighted remarks from New York Fed President John Williams, who said the US economy shows “remarkable resilience,” while inflation remains the “big challenge” and that “another rate hike may be appropriate by the end of the year.”

Taken together, BBH argues that Barr and Williams’ comments “strengthen the case for additional Fed funds rate hikes,” providing a supportive backdrop for continued Dollar strength.

Gold bears still in control

Gold trimmed some losses on Friday, with XAUUSD trading just below $4,300 after bouncing from support in the $4,230 area on Thursday. The broader bearish trend, however, remains intact as market expectations of further Fed rate hikes and long-term US Treasury yields above 5% are likely to pose a heavy weight on precious metals.

Fed speakers have reinforced the hawkish view this week, the latest examples being Philadelphia Fed President Anna Paulson, who said that the bank will have to apply “modest” rate increases to bring inflation to target, and New York Fed President John Williams, who stated on Thursday that “it is reasonable to see another US rate hike this year.”

Looking ahead, OCBC strategists underline that “oil and the rates response remain the main swing factors” for gold in the near term.

They suggest that “some easing in energy prices or the USD could help gold stabilise,” whereas “a further rise in yields would keep the near-term bias under pressure,” reinforcing the view that the metal’s trajectory will be closely tied to moves in commodity markets and bond yields.

(Source: OANDA)

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