Silver bulls face Fed shock as XAG/USD slips before PCE test

Silver is finding out that cheaper oil is not enough to calm a market worried about the Federal Reserve.

The metal fell for a third straight session on Thursday, trading around $56.90 an ounce in Asian hours, as investors cut exposure to non-yielding assets before a key US inflation report.

The move came even as easing Middle East tensions pulled crude prices lower, a development that would normally soften inflation anxiety.

This time, however, the dollar and the Fed rate path are doing the talking.

Fed repricing hits non-yielding metals

The main pressure on silver is coming from a sharper turn in interest-rate expectations.

Markets are now pricing in an 83.1% probability of at least one Fed rate increase by December, according to the CME FedWatch Tool.

That shift matters because silver, like gold, does not offer a yield.

When traders expect higher returns from cash or short-dated bonds, precious metals become harder to hold unless safe-haven demand is strong enough to offset the opportunity cost.

Fed Chair Kevin Warsh has reinforced the central bank’s inflation-fighting stance, while also signalling less reliance on forward guidance.

Analysts say that has made markets more sensitive to every incoming data point, especially inflation numbers.

Dollar strength adds another headwind

The dollar has added to the pressure.

The US Dollar Index held close to 101.80, a one-year high, after a sharp rally driven by expectations that US rates may stay higher for longer.

A stronger dollar makes silver more expensive for buyers using other currencies.

That can weaken demand from overseas investors and physical-market participants, especially when the metal is already under pressure from rising yields.

The move has also weighed across the wider precious-metals space, with gold recently breaking below the $4,000 level as investors reassessed the appeal of defensive assets in a tighter policy environment.

PCE data becomes the next trigger

The immediate test is the US personal consumption expenditures report due later on Thursday.

Economists expect headline PCE inflation to rise to 4.1% year-on-year in May from 3.8% in April, while core PCE is forecast to edge up to 3.4%.

Oil’s pullback after progress in US-Iran peace efforts has eased one source of inflation pressure.

But traders are not yet convinced that it will be enough to change the Fed’s reaction function.

For silver, that leaves the near-term bias fragile. A softer inflation print could slow the dollar rally and offer some relief.

A hotter number would likely strengthen the case for tighter policy and keep XAG/USD under pressure.