Following the second reading of first quarter GDP, remarks from US Federal Reserve Chair Janet Yellen put metals in a tailspin, sending bullish precious metals holders scurrying for cover after her more hawkish observations raised expectations of further tightening of monetary policy. Even though financial markets and futures traders remain unconvinced that action is likely during the “live†June FOMC Meeting, there is heightened speculation that July might see another 25 basis point rate hike. Considering the upgraded view of the American economy and stronger inflation could very well foretell higher interest rates, the US dollar continued to climb versus international peers, adding to the more medium-term downward pressure on precious metals. Should the upcoming employment data due from the United States prove more positive than the prior month’s reading, the stage could be set for further declines in silver prices as investors look towards higher yielding, quality assets.
Dollar Determination Drives Silver Prices Lower
At present, the inverse correlation between silver prices and the US dollar index continues to strengthen, underscoring the importance of the relationship in determining the outlook for silver prices. The correlation coefficient currently is sitting at -0.9191, with a figure that is closer to -1.0000 implying a very strong inverse relationship. The factors that are buoying the dollar, namely the more hawkish bent of the US Federal Reserve, continue to add to the currency index’s momentum higher. The dollar index trending near the highest levels since March has seen silver prices slip to the lowest levels since the middle of April.  During this time, readings on inflation and GDP have been the primary drivers of these dollar gains, with the weak nonfarm payrolls figure reported earlier in May overshadowed by the more hawkish leanings of key FOMC voting members.
The upgraded 0.80% second estimate of first quarter GDP is helping to drive the narrative of 2-3 interest rate hikes over the course of 2016. At present, Fed Funds futures tracked by the CME Group are pointing to a 29.30% probability of the benchmark rate sitting at 1.00% and a 9.60% chance of 1.25% by the end of the year. While markets believe that June rate hike is still highly unlikely, the probability of July action is 61.00%. A key determinant in any future action will depend on employment metrics rebounding.  Economists are currently forecasting nonfarm employment creation of 170,000 jobs during the month of May, slightly better than the 160,000 added during April. However, recent trends in initial jobless claims and Challenger Job Cuts highlight a degree of uncertainty in the labor market.A strong NFP reading will likely continue to add to the ongoing dollar rally, hurting silver prices even more.
