Weaker US Dollar lifts Silver, but Fed rate-hike risks constrain gains

• 1.35% is Silver's gain on Tuesday. A softer US Dollar and lower Treasury yields underpin the advance.
• Oil prices retreat as hopes of progress in Washington-Tehran diplomacy outweigh conflicting reports.
• Silver's rebound faces potential limits from stubborn US inflation and expectations that the Fed will raise interest rates in December.

$57.90 is the approximate price of Silver (XAG/USD) at the time of writing. The metal is rebounding on Tuesday, gaining 1.35% on the day as the US Dollar (USD) softens and US Treasury yields fall. Reports suggesting diplomatic progress between the United States (US) and Iran prompted a steep drop in Oil prices, although those reports were later disproved.

According to an initial announcement by Israel's Channel 12, a compromise proposal put to Iranian officials by Pakistan's army chief had reportedly secured preliminary approval from Washington and Tehran. The news fuelled hopes that a diplomatic breakthrough could lower Middle East tensions and ease disruption to global energy supplies. A diplomat taking part in the negotiations later denied that an agreement was close, underscoring the uncertainty over the talks.

After briefly trading above $100 earlier in the day, West Texas Intermediate (WTI) Crude Oil fell back towards $97.40 at the time of publication. The sharp response to the initial reports eased fears of sustained energy-led inflation. Those concerns have grown since the conflict began in late February.

Expectations of cheaper energy are also weighing on US Treasury yields and the Greenback. This provides a more supportive backdrop for assets that pay no yield, including Silver.

The Federal Reserve's (Fed) policy outlook could nevertheless constrain Silver's rebound. Following recent US inflation releases, expectations have strengthened that policymakers could deliver another interest rate increase before year-end.

September's Consumer Price Index (CPI) and Producer Price Index (PPI) both came in above market forecasts, underlining the persistence of inflationary pressures. Lower Oil prices could ease part of that concern. Even so, energy costs are still above pre-conflict levels.

A December rate increase carries a probability of approximately 92%, according to current pricing in the CME FedWatch Tool. Traders put the likelihood of a hike at the October 27-28 Fed meeting at 17%.

Thursday's Initial Jobless Claims and Friday's preliminary October S&P Global Purchasing Managers Index (PMI) readings are the next focus for investors. Fed officials are in their blackout period before next week's monetary policy decision. The data could therefore shape expectations for further interest rate rises and determine whether Silver's rebound continues.