Metals prices were all trading higher on Monday, with copper and silver all looking to catch up with gold after underperforming in recent weeks, notes Fawad Razaqzada, technical analyst at Trading Candles.
The yellow precious metal has recovered from a weaker start this month and is now looking to push higher for a sixth consecutive month. On the other hand, Silver closed lower for two straight months and fell further at the start of this month, following a big rally between March and May. Thanks to the recent unwinding of yen-funded carry trades that sparked a bout of volatility across financial markets, silver, a more risk-sensitive metal than gold, fell sharply. But like most other risk assets, the grey metal appears to have formed a low and will be looking to regain its poise this month.
Calmer Markets Boost Appeal of Silver
Thanks to the calmness across markets since Tuesday of last week, investors have scaled back their expectations for aggressive Fed rate cuts, moving away from the earlier panic that had led to pricing in an emergency cut before the September meeting. Markets are now attaching the same probability for a 25- and 50-basis-point cut in September, i.e., both at 50%. The fact that Japan was out on holiday overnight has also made for a much calmer environment at the start of this week. With panic almost over (or at least for now anyway), all major risk assets including silver have been able to recoup some of their recent losses attributed to the big yen-funded carry unwind.
Focus Turns to US Inflation and Retail Data, Chinese Industrial Production
If we don’t see any upside surprises in US inflation data this week, this should cause the US dollar index to fall further and support buck-denominated precious metals.
Indeed, this week, all eyes will be on US inflation figures, alongside key industrial data from China and a series of economic updates from the UK and Eurozone. The Chinese data, which includes industrial production and fixed asset investment, due out on Thursday, should be important for industrial metals including silver.
But the focus will be primarily on US CPI (Wednesday) and PPI (Tuesday). After the latest jobs report and ISM manufacturing PMI disappointment, a surprisingly weak inflation report could deliver a big blow for the US dollar, which has lost some of its yield advantage lately. Economists are expecting +0.2% month-on-month readings for both headline and core CPI and PPI inflation data. If CPI turns out to be hotter, this would argue against accelerated rate cuts that the markets have priced in. Otherwise, markets could grow in confidence with its roughly 100bp of expected cuts in 2024, putting renewed downward pressure on the dollar and potentially fuelling a fresh rally on silver.
As well as inflation, we will also have some US activity data to look forward to this week. These will include July retail sales on Thursday and some earnings reports from retailers like Walmart and Home Depot, which should reveal some clues about the health of the US consumer and in particular whether the tight US monetary policy has finally dampened consumption. Analysts are expecting weak numbers from the activity data, which, if correct, should also weigh on the US dollar.
Silver Technical Analysis and Trade Ideas
With the gold chart already looking bullish, silver could be on the verge of making a solid comeback this week.
Silver’s bullish engulfing candle on Thursday may have marked the end of the corrective phase for the metal, potentially paving the way for a new bull trend.
On Thursday, the grey metal bounced strongly from the upper end of the long-term support area between $25.75 to $26.50. The upper end of this range i.e., $26.50, is where silver had taken off in May. So, it is a positive sign to see support holding here. The metal has now found some further upside follow-through, which is essential that it now holds onto.
An ideal scenario for the bulls today would be if we can close above resistance around the $28.00 area, with a more significant level seen around $28.65.
If and when silver clears these levels then the bulls will become more confident that the next leg of the rally which began in March, has resumed. So, the potential is there that we could see a much larger rally soon, assuming US inflation data does not through any spanners in the works.
On the downside, short-term support is seen around $27.55, followed by $27.26, marking Thursday’s high. Silver at the very least must hold above this level on a closing basis in the next few days.