Spot silver (XAG/USD) retreated during Wednesday's Asian trading session, trading around $74.30 and giving back some of the previous day's gains. While escalating tensions in the Middle East continue to fuel market risk aversion, a strengthening US dollar and expectations for the US Federal Reserve to maintain high interest rates have capped further upside for the white metal.
Recent developments in the Middle East have again become a focal point for global markets. Reports indicate Iran launched ballistic missiles towards Kuwait and Bahrain, with the US subsequently taking retaliatory action against Iran's Qeshm Island. Concurrently, significant uncertainty remains regarding the progress of negotiations between the US and Iran, keeping markets on alert for a potential further escalation in regional conflict.
Typically, rising geopolitical risks benefit precious metals as they attract safe-haven buying. However, the market reaction this time has shown some divergence. Due to persistent shipping risks in the Strait of Hormuz, international energy prices have risen notably, stoking market concerns about a potential resurgence in global inflationary pressures. The market widely believes that if shipping through the Strait of Hormuz remains constrained, global energy supply could face further tightness. Market estimates suggest roughly 20% of the world's seaborne crude oil transits through this region. Rising energy prices could not only increase corporate operating costs but also potentially delay the process of global disinflation.
Against this backdrop, investor expectations for future Fed monetary policy have adjusted. The market is beginning to price in the possibility that US interest rates could remain elevated for a longer period to contain inflationary pressures. For silver, a high-interest-rate environment is generally unfavorable for price performance, as silver itself does not generate interest income, making its holding cost relatively higher.
Meanwhile, the latest US economic data has further reinforced market expectations for a prolonged high-rate environment. Data showed the US ISM Manufacturing Purchasing Managers' Index (PMI) rose to 54.0 in May, up from the previous 52.7 and significantly exceeding market expectations, marking the strongest expansion level since May 2022.
The rebound in manufacturing activity indicates the US economy remains resilient. At the same time, the US labor market continues to send positive signals. The latest Job Openings and Labor Turnover Survey (JOLTS) data showed US job openings rose to 7.6118 million in April, hitting a near two-year high, while layoffs continued to decline. The robust manufacturing and jobs market data suggests the US economy has yet to show clear signs of slowing. For the Federal Reserve, this implies it has more room to maintain its current restrictive monetary policy to ensure inflation returns to target levels.
Consequently, the US Dollar Index (DXY) remains elevated, applying noticeable pressure on the precious metals market. As silver is priced in US dollars, a stronger dollar increases the cost for global investors to purchase silver, thereby dampening demand. However, from a medium-to-long-term perspective, silver continues to be supported by industrial demand. With the ongoing expansion of new energy, power infrastructure, and artificial intelligence industry chains, market expectations for industrial silver demand remain optimistic. This is also a key reason why silver prices can maintain relatively high levels.
Technical Analysis Perspective
From a technical standpoint, spot silver on the daily chart remains in a consolidation phase at elevated levels. The price had accumulated significant profit-taking pressure following a continuous rally, making the recent technical correction a normal phenomenon. The area around $74 currently serves as a crucial short-term support zone. A decisive break below this level could lead to a further correction towards the $72.50 area. On the upside, $75.50 constitutes the first resistance zone. A firm recovery above this level could pave the way for another attempt to challenge the $77.00 and $79.00 areas. The Moving Average Convergence Divergence (MACD) indicator remains above the zero line, but the red histogram momentum has contracted, indicating a slowdown in short-term bullish momentum.
Short-Term Chart Outlook
Observing the 4-hour chart, silver has entered a consolidation phase. The Relative Strength Index (RSI) has retreated towards the neutral zone, suggesting the previous overbought condition has been somewhat alleviated. The short-term trend may oscillate within the $74 to $75.50 range as the market awaits new fundamental catalysts.
Key Upcoming Data
In the coming days, the US Non-Farm Payrolls (NFP) report will be a key market focus. If employment data remains strong, expectations for the Fed maintaining high rates could intensify further, pressuring silver. Conversely, if job growth slows, it could reignite market expectations for future rate cuts, providing a rebound opportunity for silver.
Market Dynamics Summary
The silver market is currently in a phase where safe-haven demand and high interest rate expectations are in a tug-of-war. On one hand, escalating Middle East tensions and rising energy prices provide some support for precious metals. On the other hand, persistently strong US economic data is driving dollar strength, limiting silver's upside. In the short term, market focus will center on the US jobs data and shifts in Fed policy expectations. If economic data continues to show strength, silver may maintain its high-level consolidation. If signs of cooling emerge in the labor market, silver could regain upward momentum. Overall, medium-to-long-term growth in industrial demand continues to provide important underlying support for silver.
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