Silver Price Forecast: XAG/USD declines to near $82 as US Dollar regains ground

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Silver price (XAG/USD) is down 1.6% to near $82.00 during the European trading session on Thursday. The precious metal declines as the US Dollar (USD) rebounds strongly, following upbeat ADP Employment and surprisingly strong ISM Services PMI data for February.

Silver price trades 1.6% lower to near $82 as the US Dollar rebounds.
Upbeat US data and receded dovish Fed prospects have supported the US Dollar.
Military escalation between the US, Israel, and Iran boosts demand for safe-haven assets.

As of writing, the US Dollar Index (DXY), which tracks the Greenback's value against six major currencies, trades 0.35% higher to near 99.10.

Technically, a higher US Dollar makes the Silver price an unfavorable risk-reward bet for investors.

The ADP private employment report showed job growth of 63K in February, above market expectations, while the Institute for Supply Management (ISM) reported that the Services Purchasing Managers Index (PMI) rose to 56.1 in February from 53.8 in the previous month. Economists expected the data to come in lower at 53.5.

At the same time, receding dovish Federal Reserve (Fed) prospects for the near term are also weighing on the Silver price. Traders seem confident that the Fed will not cut interest rates in the first half of the year, according to estimates based on the CME FedWatch tool. Such an environment diminishes demand for non-yielding assets, such as Silver, which tend to benefit from lower interest rates.

However, intensified geopolitical tensions in the Middle East could offer a cushion to the Silver price. The war involving the United States (US), Israel, and Iran is expected to continue for longer than initially anticipated, following a denial from Tehran over the New York Times (NYT) report claiming that Iran’s Ministry of Intelligence reached out indirectly to the US Central Intelligence Agency (CIA) with an offer to discuss terms for ending the conflict.

Economic Indicator

ADP Employment Change

The ADP Employment Change is a gauge of employment in the private sector released by the largest payroll processor in the US, Automatic Data Processing Inc. It measures the change in the number of people privately employed in the US. Generally speaking, a rise in the indicator has positive implications for consumer spending and is stimulative of economic growth. So a high reading is traditionally seen as bullish for the US Dollar (USD), while a low reading is seen as bearish.

Why it matters to traders?

Traders often consider employment figures from ADP, America’s largest payrolls provider, report as the harbinger of the Bureau of Labor Statistics release on Nonfarm Payrolls (usually published two days later), because of the correlation between the two. The overlaying of both series is quite high, but on individual months, the discrepancy can be substantial. Another reason FX traders follow this report is the same as with the NFP – a persistent vigorous growth in employment figures increases inflationary pressures, and with it, the likelihood that the Fed will raise interest rates. Actual figures beating consensus tend to be USD bullish.