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  • Silver has bounced at the $26.00 mark for the second time this week.
  • The precious metal is still set to finish the session lower amid higher US bond yields and a stronger US dollar.
  • Key risk events loom and could send XAG/USD below $26.00.

Spot silver prices (XAG/USD) again bounced at the key support offered by the $26.00 level, the second time they have done so this week and the third time they have done so since the start of February, since which time the level has proven a strong floor for the price action. A break below the $26.00 level (and below Wednesday and Tuesday’s lows in the $25.80s) would open the to accelerated downside perhaps as far as the $24.00 level, where resides the 2021 low (set on 17 January) and spot silver’s 200-day moving average. On the day, silver trades with losses of over 2.0% or around 60 cents.

Driving the day

Silver was weighed on Wednesday by rising US government bond yields, with the 10-year yield currently up roughly 6bps on the day to around 1.475% and at one point coming pretty close to the 1.50% mark. Real yields are also up – note that precious metals (which yield nothing when you own them) are negatively correlated to real yields as when real yields rise this reduces the relative attractiveness of non-yielding assets.

The modestly stronger US dollar also did not help things; DXY has recovered back to trade around the 91.00 level for most of the session, aided by higher yields and safe-haven demand as a result of a mild deterioration in the market’s broader appetite for risk (US stocks, risk-sensitive FX and industrial metals are mostly lower).

Looking ahead, key US-related risk events loom; Thursday sees Fed Chair Jerome Powell speaking and the release of Weekly Jobless Claims numbers, while Friday sees the release of the February Labour Market Report, which will be the main event of the week from a global macro perspective. A combination of strong US data and a less dovish than hoped for Powell could be the catalyst for a move below $26.00 (and below $1700 in gold).

Potential Fed response to rising bond yields

Fed speak on Wednesday has for the most part not revealed anything new in terms of how Fed officials view the US economy, but Fed members have been talking much more openly about the kinds of policies they would like to see employed in order to curb rising bond yields if things got “out of control”. Operation twist (where the Fed maintains the monthly pace of treasury purchases but increases the weighted average maturity of its bond purchases) and yield curve control (where the Fed sets a yield target and buys bonds in whatever quantity is necessary to keep yields below this level) are both being talked about. It seems as though Fed members would need to see a significant amount of further upside in US bond yields in order to justify these policies, however, hence why desks are calling for more Fed action only if 10-year yields rally to the 1.75%-2.0% region.

In terms of what the above means for precious metals like silver; the more inclined the Fed is to intervene in bond markets and keep yields low the better. However, risks appear tilted to the downside in the short-term for silver given that, in order for the Fed to act with tweaked/more QE, yields are likely going to have to rise a lot more, which is itself a negative. Fed Chair Jerome Powell will be speaking to the WSJ on Thursday, with his remarks scheduled for release at 17:05GMT and traders will be on the lookout for more information regarding all of the topics discussed above.