Dollar Strength Brings Silver to its Knees

Silver Outlook:

Jackson Hole Symposium: Doom and Gloom for Silver?

As the coronavirus pandemic wreaked havoc in the markets, demand for Gold and its Silver counterpart increased, while the Dollar struggled to stay afloat. Meanwhile, the USD has managed to rebound slightly after a series of positive economic data combined with the authorization of a potential Covid-19 vaccine led to renewed hopes of an economic recovery.

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Following the FOMC minutes last week where Fed Chairman Jerome Powell once again confirmed that low interest rates will remain for the foreseeable future, unlimited quantitative easing (QE), a ballooning balance sheet and low treasury yields continue to remain a cause for concern. This draws our attention to what is probably the largest event risk of the week, the Federal Reserve’s Jackson Hole Economic Policy Symposium which is scheduled to take place on Thursday 27 August at 9:10 am (EST). In this event, Jerome Powell is expected to clarify the future direction of monetary policy and may potentially set the foundation for September’s meeting.

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Fibonacci Support Holds Bulls at Bay

After five consecutive months of gains, silver has stumbled into a key level of Fibonacci support, diminishing the hopes of a bullish continuation.

The monthly chart below highlights Fibonacci levels from two major moves. The first Fibonacci retracement (pink) represents the historical move between the September 2008 low and the March 2011 high, while the second Fibonacci (blue) represents the short-term move, plotted between the March 2011 high and the March 2020 low.

XAG/USD Monthly Chart

Chart Prepared by Tammy Da Costa, IG

After recovering from March lows, a strong bullish trend has been present, with the price of silver looking to testing a fresh high at the beginning of August. However, this level, which is the 50% retracement level of the historical move, continues to hold strong, exerting downward pressure on the precious metal.

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CCI Falls Below -100

Meanwhile, from a shorter-term perspective, the Commodity Channel Index (CCI), a technical indicator used to measure the price of an asset in relation to its recent average, has fallen below -100 as indicated on the four-hour chart below, a possible indication that downward momentum may be slowing, with price action possibly forming a penchant for mean reversion as prices fall into oversold territory.

Silver 4-Hour Chart

Chart Prepared by Tammy Da Costa, IG

Moving Forward

As prices continue to consolidate between the key support and resistance level, renewed USD weakness could see an extension of the bullish trend, with prices retesting 2918.8, the 50% retracement of the primary move.
If this level is broken, the 3000 psychological level would be the next level of interest.
A break below 2605.3, the 38.2% retracement of the secondary move, may result in further downward pressure, with a possible reversal towards 2500.

Client Sentiment

According to client sentiment, at the time of writing, majority of retail traders are showing a bullish bias towards Silver, with 84% of traders holding long positions. We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests that prices may fall amid signs of a further US Dollar strength.

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Aug 27

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