Silver attempts cautious rebound ahead of closely watched Fed decision

Silver (XAG/USD) trades around $63.40 on Tuesday at the time of writing, up 0.28% on the day. The white metal attempts to stabilize as investors refrain from taking large positions ahead of the United States (US) Federal Reserve (Fed) monetary policy decision on Wednesday.

Silver continues to face a challenging environment due to a firm US Dollar (USD) and elevated US Treasury yields. Higher yields increase the opportunity cost of holding non-yielding assets such as precious metals and could therefore limit attempts by XAG/USD to extend its recovery.

Bond yields are also rising across several major economies as the energy shock caused by the war in the Middle East revives inflation concerns. Higher Oil prices are making the task more difficult for central banks seeking to bring inflation sustainably back toward their targets.

In the United States, the Consumer Price Index (CPI) rose 3.4% YoY in August, while the Producer Price Index (PPI) accelerated to 5.4% from 4.8% in July. These figures, combined with recent Fed communication emphasizing the need to contain inflationary pressures, reinforce expectations of an interest rate hike on Wednesday.

Much of the risk surrounding a hawkish Fed decision, however, appears to be already priced in. Investors’ attention is therefore likely to focus primarily on the central bank’s updated economic projections and comments from Fed Chair Kevin Warsh regarding the future path of interest rates.

Silver could remain under pressure if the Fed signals that a September rate hike marks the beginning of a more sustained tightening cycle. Such a scenario could push US Treasury yields higher and support the US Dollar, two factors that are generally negative for the white metal.

Conversely, a less hawkish-than-expected message could offer some relief to Silver, particularly if it triggers a decline in bond yields and the US Dollar. The market therefore remains particularly sensitive to any guidance the Fed provides regarding its upcoming policy decisions.

Beyond monetary policy, the rise in global bond yields also reflects increasing government financing needs and concerns over fiscal sustainability. Over the longer term, these worries could support demand for precious metals as alternatives to sovereign assets, although the interest rate outlook remains the main driver for Silver for now.