Silver hits three-month low with 5% slide as bets on Fed rate hike mount

• A 5% slide in Silver on Thursday reflects pressure on precious metals from expectations that restrictive monetary policy will remain in place for longer.
• Inflation worries intensify as escalating Middle East tensions drive Oil prices higher.
• An unchanged Fed interest rate decision is expected next week, while markets anticipate a further increase in December.

Down 5.00% on Thursday, Silver (XAG/USD) trades at around $55.05 at the time of writing, extending its steep retreat after touching a three-month low of $55.01. Mounting inflation worries have strengthened expectations that the Federal Reserve (Fed) will keep interest rates elevated for longer, leaving the precious metal under heavy selling pressure. A recovery in the US Dollar (USD) is also contributing to the decline.

Behind Silver's retreat, intensifying geopolitical tensions in the Middle East have heightened fears of disruption to global energy supplies and a resurgence in inflationary pressures.

Plans for fresh military strikes against Iran after the United States (US) midterm elections have reportedly been prepared by the US and Israel, according to The New York Times. The country's energy infrastructure could be among the targets.

At the same time, relations between Saudi Arabia and the Houthis are deteriorating further, with new attacks reported on the Shaybah Oil field and King Fahd International Airport. Underscoring the worsening regional security situation, the US State Department has also instructed non-emergency government employees and their families to leave Saudi Arabia.

Oil prices are rising in response to these developments. West Texas Intermediate (WTI) crude is rebounding towards $98.65, up nearly 2% on Thursday, having approached the $100 mark.

The monetary policy outlook is becoming more difficult as higher energy costs stoke fears that inflation will remain persistent. To avert a renewed acceleration in consumer prices, central banks may have to keep interest rates at restrictive levels for longer.

For Silver, which pays no interest, these conditions are particularly adverse. As borrowing costs and government bond yields rise, so does the opportunity cost of owning non-yielding precious metals, diminishing their attractiveness relative to interest-bearing assets.

Next week's Fed monetary policy meeting is now the focus for investors. Following a 25 basis point (bps) increase in borrowing costs in September, the US central bank is widely expected to hold interest rates steady. Nevertheless, expectations of a further rise in December are gaining ground. Markets price in an 89% probability of another rate increase before year-end, according to the CME FedWatch Tool.

The US Dollar is drawing support from these hawkish expectations. This makes Silver costlier for holders of other currencies, placing the precious metal under additional pressure.

Silver technical outlook remains bearish

At $55.17 on the four-hour chart, XAG/USD retains a bearish short-term bias, trading well beneath the 100-period simple moving average (SMA) at $59.13 and the 200-period SMA at $61.75. Horizontal support at $54.77 lies just below the current price. Meanwhile, the Relative Strength Index (14) is moving into oversold territory near 29, suggesting that downward momentum is stretched without yet overturning the prevailing bearish structure.

Initial resistance stands at $56.60, ahead of the recent horizontal hurdle at $58.00. Further above, the 100-period SMA at $59.13 and the 200-period SMA at $61.75 strengthen a broader area of supply. A breach of $54.77 support, by contrast, would leave scope for further losses and preserve the bearish bias, notwithstanding the oversold RSI reading.

(The technical analysis of this story was written with the help of an AI tool. Know more.)