Ahead of the FOMC meeting, silver is on the verge of a breakout. The FOMC is set to cut interest rates tomorrow, but the size of that cut remains uncertain, potentially leading to significant volatility in the coming days. Interestingly, futures and swap markets are pricing different odds for the September meeting, which is a rare occurrence. At the time of writing, the futures market is showing 70% odds for a 50-basis-point rate cut, while the swap market is pricing in 50%.
Normally, a 50-basis-point cut would be extremely positive for silver. However, the reaction might not be straightforward after the initial spike. Contrary to popular belief among many traders, silver and stocks have shown a high positive correlation, reaching 81% over the last two years. In the event of a 50-point cut, silver’s initial reaction is likely to be upward, but if the stock market interprets the cut as a signal of recession and declines sharply, silver may follow stocks and drop as well.
Given the high level of uncertainty surrounding market reactions to either a 25 or 50-point cut, traders should exercise extreme caution before making any moves tomorrow.
(XAGUSD Daily Chart)
As the market awaits the FOMC decision, silver is aggressively testing its corrective downtrend. If silver breaks above the trendline, the next potential targets are 31.75 and 33. However, given the expected high volatility in the coming days, there is a strong possibility of a false breakout or false rejection from the trendline. Key levels to watch are 31.15 on the upside and 30 on the downside.
