Silver price moves from bad to worse after strong inflation numbers

Silver price continued its bearish trend after the US published January’s consumer inflation numbers. After peaking at a multi-month high of $24.60 early this month, the XAG/USD price has plunged by ~11% to $22. This price is the lowest it has been since December last year.

Strong US inflation data

Silver and other precious metals have erased most of the gains that they made earlier this year. This pullback can be traced to when the US published blemish-free jobs numbers earlier this month. These numbers revealed that the country’s economy added over 500k jobs in January while the unemployment rate dropped to 3.4%.

In the aftermath of these results, many Federal Reserve officials, including Jerome Powell, noted that inflation could remain higher for a while. In economics, this is known as the Philip’s curve, meaning that inflation rises when the unemployment rate drops.

Therefore, silver price pulled back after the stronger-than-expected US inflation data. According to the Bureau of Labor Statistics, headline inflation jumped from 0.1% in December to 0.5% in January. On a YoY basis, inflation dropped modestly to about 6.2% in January.

The same trend happened in core inflation, which is a figure that excludes volatile items. Core inflation came in at 0.4% and 5.6% on a YoY basis. Therefore, the silver price declined since investors anticipate that the Fed will be more hawkish than expected. 

This hawkishness is warranted considering that the Fed has won the full-employment battle. Inflation, which is part of its core mandate, is yet to be won. In most periods, commodity price declines in periods when the Fed is hawkish.

Silver, like other industrial metals like iron ore, have declined because of concerns about the pace of China’s recovery. Recent data by Fitch noted that a full-reopened China could push silver demand up by about 3.5% in 2023.

Silver price forecast

XAG/USD chart by TradingView

On the daily chart, we see that silver price found strong resistance at $24.60 in January and February. It formed what looks like a triple-top pattern in that level. This price was slightly below the 78.6% Fibonacci Retracement level. Now, it has dropped below the neckline of the triple-top pattern at $22.78. 

Silver has also moved below the 50-day and 200-day moving averages. Therefore, the outlook for the XAG/USD pair is bearish, with the next level to watch being at $20. This price is about 10% below the current level.