Silver Price Forecast: XAG/USD slumps from two-year high near $28.30 on hot US Inflation data

The price of silver (XAG/USD) has pulled back from its recent two-year high of $28.36 following the release of the latest consumer price inflation data by the United States Bureau of Labor Statistics (BLS). The report revealed that inflation remains stubbornly high, which, combined with strong payroll data for March, has dampened market expectations for the Federal Reserve (Fed) to start cutting interest rates at the June meeting.

The annual headline Consumer Price Index (CPI) increased to 3.5% compared to expectations of 3.4% and the previous reading of 3.2%. Core inflation, which excludes volatile food and energy prices, also rose steadily to 3.8%. Economists had anticipated a deceleration to 3.7% for this widely-watched inflation measure.

Fed policymakers have consistently emphasized that they will not consider reducing interest rates until they are convinced that inflation will sustainably return to the 2% target. To achieve this, monthly inflation would need to increase at a rate of 0.17%. In March, both headline and core CPI rose by 0.4%, exceeding expectations of 0.3%.

Looking ahead, traders are expected to adjust their expectations for the Fed to begin reducing interest rates in the third quarter of this year. The persistent high inflation is likely to increase uncertainty regarding the three projected rate cuts for this year, as indicated by Fed policymakers in the latest dot plot.

The strong CPI figures have led to a significant rise in yields on interest-bearing assets, such as US bonds. The yield on 10-year US Treasury bonds has climbed to 4.48%. Additionally, the US Dollar Index (DXY) has rallied, reaching a crucial resistance level of 105.00.

In terms of technical analysis, the price of silver has experienced a robust rally after breaking out of the Ascending Triangle chart pattern on the daily timeframe. The strength of this breakout will be tested if the price corrects towards the horizontal resistance of the aforementioned chart pattern, which is plotted from the high of $26.09 on April 14, 2023. The upward-sloping 20-day Exponential Moving Average (EMA) at $26.00 indicates that near-term demand remains positive.

The 14-period Relative Strength Index (RSI) has declined after reaching 76.00, suggesting that the oscillators are cooling down after being in extremely overbought territory.