XAG / USD stabilizes above $ 22.00 as focus shifts to Friday’s US job report

• Silver hit Thursday but stabilized just above the $ 22.00 level as the focus shifts to Friday’s NFP.
• The precious metal has been under selling pressure lately as Wednesday’s restrictive Fed protocol tightened Fed betting.
• XAG / USD could be heading for a retest of December lows below $ 21.50 if the job report approves a hike in March.

Spot silver (XAG / USD) prices took a hit so far on Thursday, although selling pressures eased in recent trading after the precious metal found support at the $ 22.00 level. At the current level of just below $ 22.20, XAG / USD is trading more than 2.5% lower on the day and is nearly 5.0% below its highs of over $ 23.20 on the Wednesday prior to the latest Hawkish Fed minutes . The minutes surprised on several fronts, with FOMC participants consistently concerned about increased inflation and support for a potential earlier and faster rate hike cycle to manage the risks. Furthermore, the strong support for an immediate reduction in the Fed’s total assets after the start of the rate hike cycle was also surprising, as previously there were only radical Fed members who ignored quantitative tightening.

The restrictive nature of the protocol caused bond yields to skyrocket and, particularly for the precious metals markets, the move was driven by real yields. While the 10-year US market is up more than 20 basis points on the week, the 10-year TIPS yield is up about 25 basis points and recently hit its highest level since June last year. About -0.80%. Higher real returns increase the chance of non-profitable assets such as precious metals and thus reduce their attractiveness for investors. Precious metals traders will also find that market-based measures of inflation expectations have moved significantly lower this week, with 10-year break evens falling from Tuesday highs of 2.64% to current levels of 2.45%. Lower inflation expectations reduce the demand for assets that offer inflation protection, such as silver and gold.

As for the next steps for spot silver, trading is likely to enter a wait and see mode ahead of Friday’s US labor report. With the markets pricing in a strong possibility of a rate hike in March, traders are primarily trying to interpret how the December job report increases or hinders the chances of a market hike in March. The Fed described the labor market as a “rapid” move back to full employment in December, even given the below-average number of non-agricultural workers in December of 210,000, and said that if this rate of improvement continues, interest rate hikes will be guaranteed soon.

The Fed is likely to look through weaker monthly NFP numbers as long as easing measures (unemployment rate and activity rate) show signs of improvement (especially the former). Fed politicians have recognized that the pandemic is holding people back from the labor market, which means that the scope for big job gains in the MoM is currently limited. As long as the weak measures continue to indicate a tight labor market (like other data releases this week), the bar is low on Friday’s NFP headline to meet the Fed’s criteria for continued rapid progress. Consensus expectations for 400,000 jobs created in December easily fit this calculation.

This suggests that if the dollar / real yields decline, there is limited scope for precious metals to rebound as traders reverse their recent restrictive bets on a rate hike in March. If it did and XAG / USD rallied, the main resistance levels would be the 21-day moving average and recent week lows around $ 22.60 and then recent week highs at 23.40- Dollar area. If a strong labor market sees the prospect of a rate hike in March, spot silver prices could revert to a test of December lows of just under $ 21.50, a further 3.0% decline from current levels.