Fed hike risks restrain silver’s recovery despite a weaker US Dollar

• A softer US Dollar and lower Treasury yields underpin Silver's 1.35% advance on Tuesday.
• Oil prices retreat as hopes of progress in Washington-Tehran diplomacy gain ground, even as reports remain contradictory.
• Silver's rebound may be constrained by sticky US inflation and expectations that the Fed will raise interest rates in December.

A softer US Dollar (USD) and falling US Treasury yields support Silver's (XAG/USD) rebound on Tuesday, with the metal trading near $57.90 at the time of writing, a gain of 1.35% for the day. Reports suggesting diplomatic progress between the United States (US) and Iran prompted a steep fall in Oil prices, helping the precious metal, though those reports were later disproved.

Hopes of easing Middle East tensions and fewer disruptions to global energy supplies emerged after Israel's Channel 12 initially reported that Washington and Tehran had both reportedly given preliminary approval to a compromise proposal. Pakistan's army chief had presented the proposal to Iranian officials. A diplomat participating in the negotiations later rejected reports of an imminent agreement, underscoring the uncertainty over the talks.

The initial headlines prompted a sharp sell-off in Oil. Having briefly crossed $100 earlier in the day, West Texas Intermediate (WTI) Crude Oil pulled back towards $97.40 at the time of publication. The fall eases worries over sustained energy-led inflation, which have deepened since the conflict began in late February.

For non-yielding assets such as Silver, the prospect of cheaper energy creates a more supportive backdrop by weighing on both US Treasury yields and the Greenback.

The Federal Reserve's (Fed) monetary policy outlook could nevertheless restrict Silver's recovery. Following the latest US inflation figures, expectations have strengthened that policymakers could deliver another interest rate increase before the year ends.

Persistent price pressures were evident in September's Consumer Price Index (CPI) and Producer Price Index (PPI), both of which came in above market forecasts. Lower Oil prices could ease some of these worries, but energy remains more expensive than it was before the conflict.

Traders put the probability of a December rate increase at approximately 92%, according to the CME FedWatch Tool. For the Fed's October 27-28 meeting, they currently price in a 17% chance of a hike.

The next releases on investors' radar are Thursday's Initial Jobless Claims, followed by Friday's preliminary S&P Global Purchasing Managers Index (PMI) figures for October. As Fed officials remain in their blackout period before next week's monetary policy decision, these data could shape expectations of further rate increases and determine whether Silver's rebound continues.