Silver recovers as US Dollar weakens, but Fed rate hike risks limit the rebound

• A 1.35% gain in Silver on Tuesday comes as the US Dollar weakens and Treasury yields fall.
• Oil prices retreat as hopes of progress in Washington–Tehran diplomacy outweigh conflicting reports.
• Silver's rebound may be constrained by stubborn US inflation and expectations that the Fed will raise interest rates in December.

At around $57.90 at the time of writing, Silver (XAG/USD) is recovering on Tuesday with a daily gain of 1.35%. A softer US Dollar (USD) and lower US Treasury yields are supporting the precious metal. Both followed a sharp fall in Oil prices prompted by reports of possible diplomatic progress between the United States (US) and Iran, which were subsequently disproved.

According to an initial report from Israel's Channel 12, a compromise proposal put to Iranian officials by Pakistan's army chief had reportedly secured preliminary approval from Washington and Tehran. The report fuelled hopes that a diplomatic breakthrough might ease Middle East tensions and lessen disruption to global energy supplies. A diplomat taking part in the negotiations later denied that an agreement was imminent, underscoring the uncertainty surrounding the talks.

After briefly moving above $100 earlier in the day, West Texas Intermediate (WTI) Crude Oil fell towards $97.40 at the time of publication as Oil markets responded sharply to the initial reports. The fall eases worries over sustained energy-led inflation, which have grown since the conflict began in late February.

Lower prospective energy costs are also weighing on US Treasury yields and the Greenback. This provides a more favourable backdrop for assets that pay no yield, including Silver.

The Federal Reserve's (Fed) policy outlook could nevertheless hinder Silver's rebound. Following recent US inflation releases, expectations have strengthened that policymakers could deliver another interest rate rise before the year ends.

September readings for both the Consumer Price Index (CPI) and Producer Price Index (PPI) came in above market forecasts, underlining the persistence of inflationary pressures. The latest fall in Oil prices could ease some of those worries, but energy costs are still higher than they were before the conflict.

Traders price in a 17% probability of an interest rate rise at the Fed's October 27-28 meeting, according to the CME FedWatch Tool. For December, the probability of an increase is approximately 92%.

Thursday's Initial Jobless Claims release and Friday's preliminary October S&P Global Purchasing Managers Index (PMI) readings are the next focus for investors. Fed officials are in their blackout period before next week's monetary policy decision, leaving these figures with the potential to shape expectations for further interest rate rises and determine whether Silver's recovery continues.