Silver Price Forecast: Higher oil prices drive XAG/USD lower towards $54.00

• Higher oil prices heighten inflation concerns and expectations of further Fed rate rises, pushing Silver lower.
• An electoral stalemate in Israel adds to geopolitical uncertainty, although political backing for Netanyahu appears to be fading.
• An 84.4% probability of December tightening is priced into markets, despite expectations that the Fed will leave rates unchanged in October.

At around $54.10 per troy ounce during Wednesday’s Asian session, Silver (XAG/USD) is trading lower after the previous day’s modest advance. Attention now turns to the US Federal Reserve’s policy announcement later in the day.

Higher crude oil prices are reviving inflation concerns and strengthening expectations of additional interest rate rises, putting fresh pressure on non-yielding Silver. The advance in oil came as traders followed Israel’s election results closely, given their potential to reshape the country’s political landscape and the course of the Middle East conflict.

With Prime Minister Benjamin Netanyahu and opposition leader Gadi Eisenkot level in exit polls, the election appears closely fought. Neither political bloc seems to have won a clear majority as counting proceeds. Nevertheless, the early results suggest diminishing support for Netanyahu, a longstanding dominant figure in Israeli politics who has led the country through nearly three years of conflict.

A 92.8% probability of unchanged rates at the October meeting is priced into markets, according to CME FedWatch Tool data. Financial markets are also concentrating on Wednesday’s Federal Reserve decision, with the central bank widely expected to retain its benchmark rate within the 3.75% to 4.0% range. Investors will therefore study Fed Chair Kevin Warsh’s subsequent press conference for indications of the policy outlook, particularly with market pricing assigning an 84.4% probability to a December rate rise.

Energy trading has become quieter despite the recent turbulence in precious metals, according to strategists at Scotiabank. In their assessment, crude prices appear to have "settled into tight consolidation ranges." With WTI "steady just above $100/bbl" and Brent "above $115/bbl," they highlight a spell of relative stability across the benchmark crude contracts.

Keeping further monetary tightening on the table should continue to support the US currency, strategists at Societe Generale argue. Their assessment is that “if the FOMC message (whatever that looks like in the brave new world) keeps December hike expectations alive, our bias is to remain dollar-positive,” while they also caution that, “unless the ECB is very hawkish, European economic fundamentals will weigh.”