Silver rebounds sharply from three-month low – what's driving the recovery?

Silver prices rose more than 2% in European trading on Thursday, rebounding sharply from a three-month low and heading for their first gain in four sessions as bargain-hunting activity accelerated.

The recovery was primarily supported by broad-based weakness in the US dollar against a basket of global currencies, alongside a decline in US Treasury yields to their lowest levels in three weeks.

Less hawkish remarks from several Federal Reserve officials reduced market expectations for a US interest rate hike in October. Investors are now awaiting further US inflation data later today to reassess those expectations.

Price overview

• Silver prices today: Silver rose 2.2% to $56.88, compared with an opening price of $55.64, while recording a session low of $55.49.

• At Wednesday's settlement, silver plunged nearly 6%, marking its third consecutive daily loss and its steepest one-day decline since June. The metal also hit a three-month low of $55.40 per ounce following hotter-than-expected US inflation data.

US dollar

The US dollar index fell 0.65% on Thursday, retreating from an 18-month high of 102.95 points and reflecting broad-based weakness in the US currency against a basket of major and minor currencies.

In addition to profit-taking, the dollar weakened as demand for the currency as a preferred investment slowed, particularly amid fading expectations of aggressive US interest rate hikes in October.

US Treasury yields

The yield on the benchmark 10-year US Treasury note fell 2.25% on Thursday, extending its losses for a third consecutive session and hitting a three-week low of 5.077%. The yield is now moving toward a potential break below the 5% threshold, putting significant downward pressure on the US dollar.

Less hawkish Fed remarks

Federal Reserve Governor Michelle Bowman said the central bank had sufficient time to wait and assess developments in financial markets and the economy following September's interest rate hike before deciding whether further action was necessary.

San Francisco Federal Reserve President Mary Daly said another interest rate hike would likely be needed, but there was no urgency to act. She noted that the central bank could afford to wait until the economic outlook became clearer.

US interest rates

• Following these remarks, according to CME Group's FedWatch tool, market expectations for the Federal Reserve to leave interest rates unchanged at its October meeting rose to 68% from 46%, while the probability of a 25-basis-point rate hike fell to 32% from 54%.

• Market expectations for the Federal Reserve to leave interest rates unchanged at its December meeting rose to 10% from 6%, while the probability of a 25-basis-point rate hike declined to 90% from 94%.

• Investors are awaiting the release of September's US Producer Price Index (PPI), along with retail sales and initial jobless claims data later today, to reassess these expectations.

Silver price outlook

We expect that if upcoming US economic data comes in below market expectations, the probability of a Federal Reserve interest rate hike in October will decline, putting further downward pressure on the US dollar and Treasury yields and driving silver prices higher.