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'Looks like people are ready to buy gold below $1,200 and it is sort of a psychological level. Think people got confounded after Friday's move and the short ones are buying back now.' - Yuichi Ikemizu, Standard Bank (based on Reuters)

Pair's Outlook

During the early hours of Monday's trading session the yellow metal's price had surged above the 1,210 mark, as the bullion continued the course of regaining its losses. The commodity price managed to pass a resistance cluster just below the 1,210 level, and the metal faced only the weekly PP at 1,211.87. The weekly PP is the last resistance level before the 1,219.20 mark, where the 38.20% Fibonacci retracement level is located at. Due to these factors combined, it is expected that the cluster below will provide enough support to push the metal's price higher.

Traders' Sentiment

Traders are bullish on the metal, as 52% of open SWFX positions are long. In addition, 60% of trader set up orders are set to buy the bullion.

'The monthly decline reflects a correction from December's sharp increase and the underlying trend is still for a solid underlying increase in output'. - Tim Clayton, EconomicCalendar.com

In January, British total production experienced a 0.4% decrease compared to the previous month, the Office for National Statistics revealed on Friday. This number was mostly attributed to declines in the water and manufacturing sectors, where production fell 0.7% and 0.9%, accordingly. The largest contribution to January's fall came from pharmaceutical products that posted a 13.5% drop, following growth of 8.2% in the previous month. However, this kind of change is not unusual for the pharmaceutical industry, as it can be highly volatile due to the timing of contracts. To certain extent, it was counterbalanced by production of transport equipment that increased 2.6% and reached the highest level since April 2016. This growth was supported by a 2.4% gain posted by the wood, paper and printing industry and a 2.3% increase posted by the textile, chemicals and machinery industries. Nevertheless, the largest month-to-month growth was seen in the other mining and quarrying sector, where production advanced 3.6%. Yet, this figure only partially allowed to offset a 8.6% drop in the coal and lignite sector. On an annual basis, the British Production Index increased 3.2% in January. Growth was seen in all four major sectors but the biggest contribution of 2.7% came from manufacturing.

'We continue to expect the Fed to raise its policy rate by an above-consensus four times this year.' - Paul Ashworth, Capital Economics

The US private sector created more jobs than expected last month, providing support for a Fed interest rate hike on Wednesday. The Bureau of Labor Statistics reported on Friday that nonfarm payrolls rose 235,000 in February, while analysts expected nonfarm employment to climb 196,000 in the reported month. Meanwhile, January's gain of 227,000 was revised up to 238,000. The construction sector contributed most to the February gain, adding 58,000 jobs. Over the past six months, the sector created an average of 177,000 jobs per month Data also showed average hourly earnings advanced 0.2%, falling behind analysts' expectations for a 0.3% increase. January's rise of 0.1% was revised up to 0.1%. The jobless rate came in at 4.7% for February, marginally down from the prior month's 4.8% and in line with market forecasts. Over the past three months, the US private sector added an average of 209,000 jobs per month. The better-than-expected NFP report combined with rising inflation are likely to force the Federal Reserve to raise rates for the first time this year on Wednesday, during its policy meeting. Back in December 2016, the Central bank projected at least three rate hikes in 2017. Analysts suggest that the US labour market is at or close to full employment.

'Overall, this was a good news day for Canada's workers, but we're still well behind the U.S. in terms of getting back to full employment and more vibrant wage gains.' - Avery Shenfeld, CIBC World Markets

The Canadian unemployment rate fell unexpectedly last month, as employment rose more than expected. Statistics Canada reported on Friday that employment climbed 15,300 in February, following the preceding month's unrevised gain of 48,300 and surpassing analysts' expectations for a 600 rise. On an annual basis, employment advanced 288,000, with the largest gains posted in July 2016. Month-over-month and year-over-year, full-time employment rose 105,000 and 235,000, respectively, while the number of part-time workers declined 90,000 in February. In regional terms, the biggest employment gains were registered in British Columbia, Saskatchewan and Manitoba. The wholesale and retail trade industry contributed most to the February rise, with an increase of 35,000. Furthermore, following stronger-than-expected employment data, the Canadian jobless rate dropped to 6.6% last month, the lowest since June 2016. Analysts suggest that the Canadian economy has fully recovered from the oil price shock, which hit the economy in 2014, and the Alberta wildfires that took place in May 2016. Despite strong economic and employment growth, the Bank of Canada is unlikely to change its monetary policy.

OPEC finds itself crossing its fingers that the price falls of last week are a washout of positioning and not a structural change.

Both Brent and West Texas Intermediate (WTI) ended down some 9% last week. An emotional fall from grace as record speculative long positioning in both was shown the door after three months of stagnation. The CFTC Commitment of Traders report released last Friday only captures positioning up to the previous Tuesday and thus will not have captured just how many oil bulls remain "committed" to their views as of Friday. This week's release on Friday the 17th will.

The Saudi's, in particular, will be casting a nervous eye on it. They have unfortunately ended up in the unwanted role of swing producer, wearing most of the pain of OPEC/NOPEC cuts to prop up prices. They will be hoping that the price action of last week is a washout of positioning and not a structural change to the market. It ends up being a lose-lose situation for them otherwise. Cutting production to prop up prices, losing market share, and now looking down the barrel of lower prices after a brief rally of a few months. OPEC's renewal meeting on the 25th of May could be emotional indeed, and one suspects the Saudi's will be looking to share the heavy lifting more equitably judging by media comments by officials.

One can't really blame them in all honesty; they've not had much help from their OPEC and non-OPEC allies. Producers such as Libya and Nigeria were given a leave pass from the deal altogether. The Iraqi's, Iranian's both ramped up production ahead of the cut start date and have signalled they have plenty of production ammunition ready to go when it rolls off. The Russian's, the world's largest producer daily at some 11 million barrels a day (bpd), have managed to cut a paltry 150,000 bpd of their target of 300,000 bpd and we are three months into the reduction period. Thanks for nothing guys.

But it is the ramp up in U.S. shale that has really caught the world and OPEC on the hop. The Baker Hughes Rig Count showed yet more of those fracking rigs (sic) added last week, with the U.S. rig count hitting 768, up from 480 a year ago. Baker Hughes Rig Count The ability of shale to be profitable above $50 a barrel despite the prices of the best shale acreage exploding in price is impressive. Given their pace of innovation, they may well be profitable at much lower levels than that. Something to cause sleepless nights at OPEC's HQ in Vienna.

The other factor is just how much of the other side of those record speculative longs in the futures markets was shale oil hedging future production. As I have said in the past, the new world of shale financing means they are obliged to forward hedge and lock in profits via the futures markets. For once the banks may have done them a favour as shale may have by luck or design, hedged out their downside risk to a certain extent giving them effectively even deeper pockets.

The whole situation must be a game theorists nightmare for the Saudi's and the UAE. Having led the charge to get the production cut deal across the line, they may not even have the prisoners dilemma option of "taking the deal first," as most of their competition seems to have taken it simultaneously already. OPEC/NOPEC can expect no help from U.S. shale in future production cut deals either even if they wanted to. The shale industry is fractured (pardon the pun), with many producers and no single dominant one. There is no government body as per so much of OPEC that controls the industry. Most importantly cartel-like behaviour is absolutely against the law in the United States. There is a reason the De Beers, for instance, has no corporate presence in the U.S.A.

Coming back to the here and now, the charts make for interesting reading today.

Brent Crude (spot)

Brent has managed to catch some breath today but is still perched precariously just above $50. Resistance is above at the 100-day moving average (dma) at $52.34.

Support initially comes in at $50.1770, the 200-dma and then the 23.60% Fibonacci retracement at %50.07. (the move from the 2016 lows at $27.368 to the January 1st highs at $57.00)

For simplicity's sake lets just say that the $50.00 a barrel area, therefore, is an important support zone. A lot of clear air appear after this until the $45.75/$45.75 regions. The 38.2% fibo retrace and the low of 29th November.

Brent Daily

West Texas Intermediate (spot)

Broke $50.00 a barrel last week and is currently sitting around its 200-dma at $48.3300. A daily close above here is vital to give bulls a semblance of hope of some sort of correction from a technical basis. Above here resistance sits at $50.4700, the 100-dma.

Support is at the day's low at $47.7700 and then clear air until the 29th November low at $44.4300.

WTI Daily

Summary

Oil is not out of the woods from a technical perspective. Short-term the charts and the price action still appear to be quite bearish potentially. There is a lot of event risk this week, but the culmination will be the COT report on Friday. This will capture the price action of last week and go a long way to informing whether most of thge pain has been taken by speculators, or whether there are more tears ahead. In the bigger picture OPEC and particulalrly Saudi Arabia as the swing producer, could be in an undersirable position heading into the middle of the year.

Cable bounced above initial barrier at 1.2200 today, signaling extended recovery from 1.2133 (fresh 7-week low) where bear-leg from 1.2568 showed strong signals of stall.

Double-Doji on Thu-Fri and today's rally generated initial signal of reversal that requires minimum sustained break above 1.2200.

Further gains need to clear barriers at 1.2250/68 (07 Mar high / falling Tenkan-sen) to open next pivot at 1.2300 zone (lower base / Fibo 38.2% of 1.2568/1.2133 descend).

Correction is also signaled by reversal of slow stochastic from oversold zone and daily RSI starting to point higher.

With technical studies being supportive for extended correction, focus turns on other very important political / economical events that would have strong impact on the pair in coming days.

Broken 1.2200 barrier now acts as initial support and needs to hold dips to keep fresh recovery in play.

Otherwise, near-term risk would shift again towards key near-term supports at 1.2155/33.

Res: 1.2235; 1.2250; 1.2268; 1.2300
Sup: 1.2200; 1.2155; 1.2133; 1.2100

The Euro hit fresh five-week high at 1.0713 today, in extension of last Thu/Fri rally from 1.0524 trough.

The pair broke above thickening daily cloud that generated bullish signal, with Friday's long bullish daily candle underpinning near-term rally.

The rally also cracked important barrier at 1.0700 (Fibo 61.8% retracement of 1.0827/1.0492), with close above it to provide another positive signal for extension of recovery rally from 1.0492 higher base.

Daily MA's turned into full bullish setup, with bullish momentum building up and being supportive for further advance

Easing from fresh high is expected to face strong support at 1.0655 (daily cloud top / 100SMA), where dips should be contained to keep intact hopes of further recovery.

Above 1.0700/13 levels, next target lies at 1.0748 (Fibo 76.4%).

Conversely, return and close below daily cloud top would slow current rally and risk test of lower breakpoint at 1.0605 (daily cloud base, reinforced by Tenkan-sen line).

A number of important events, due this week, are likely to influence pair's action, with Fed's rate decision being in focus.

Res: 1.0700; 1.0713; 1.0748; 1.0761
Sup: 1.0670; 1.0655; 1.0641; 1.0605

Fed to maintain 'dot' signal for this year at three hikes

In our view, the February jobs report removed the last obstacle for a Fed hike on Wednesday, in line with the message Fed Chair Yellen set in her recent speech, see also our Flash Comment here.

It is still a bit surprising to us that the Fed has turned so hawkish so quickly. There were not many signs in neither the last FOMC statement, the minutes from the last metering nor Yellen's hearing in Congress that the Fed was going to hike already in March.

We do not expect any major changes to the statement, as not much has happened since the last meeting.

We expect the Fed to maintain the 'dot' signal for this year at three hikes in the updated projections. Yellen said in her speech that four hikes is likely one too many, as it would make monetary policy neutral instead of accommodative, see Tweet.

We expect the Fed to hike three times this year (March, July and December) and three-four times next year. We expect the Fed to begin the reduction of its balance sheet in Q1 18 (see also slide 4).

Fed still awaits more information about 'Trumponomics' but previous meetings have revealed that 'almost all' FOMC members think there are upside risks to growth due to the expectations of more expansionary fiscal policy. We have not got new information on Trumponomics since the meeting but the Fed has communicated it wants to offset more expansionary fiscal policy by increasing the hiking pace.

It is worth keeping in mind that the Fed is data dependent and will not hike unless data support the case - remember the Fed signalled four hikes in 2016 back in December 2015 but only delivered one. After the Fed turned more hawkish, we have seen a drop in the oil price, lower inflation expectations and a small selloff in the US equity markets - perhaps a small sign that the Fed has turned too hawkish, too quickly.

Markets have fully priced in a Fed hike this week - 50% probability of another hike in June

Repricing of Fed

Markets have fully priced in a Fed hike this week. Note that markets price a 50% probability of another hike in June.

Markets price in 2.7 hikes this year and nearly a total of five hikes before year-end 2018.

We think it is difficult to see a more hawkish pricing of the Fed at the moment, though we expect the Fed to deliver one or two hikes more by the end of 2018 than currently priced.

One trigger for a harder Fed pricing could be that the Fed begins to signal four hikes this year, which, however, we think is unlikely given Yellen's comments in her speech.

The Fed will soon begin to discuss reinvestment strategy

'Quantitative tightening' is becoming a market theme

FOMC members have become more vocal on their desire to reduce the Fed's balance sheet in recent months and the minutes from the last meeting revealed that the Fed should begin to discuss 'the economic conditions that could warrant changes' in the current reinvestment strategy 'at upcoming meetings'.

The Fed wants to begin the reduction when the normalisation of the Fed funds rate is 'well under way', which seems to be when it is around 1.50% (half of the Fed's estimated neutral rate at 3.00%).

We think the Fed will begin the reduction in Q1 18. An NY Fed survey shows that primary dealers expect it to begin a bit later in mid-2018.

Macro charts

Growth rebounded in H2 16 after a slowdown in H1 16

Private consumption the main growth engine

Have investments bottomed out? We think so

Higher US oil production and rig count suggest a rebound in oil investments

Still a bit more slack left in the labour market

Fed sees the world through the Phillips curve

Global business cycle has turned - synchronised recovery signal across regions

Financial conditions are easy

Actual PCE core inflation still below 2% target

Inflation expectations have rebounded but are still low

BoE to stay on hold – risks to EUR/GBP skewed to the upside

We do not expect Bank of England (BoE) to make any policy changes at its March meeting. We expect BoE to maintain the Bank Rate at 0.25%, while leaving the targets for the stock of government bond purchases (APF) and the stock of corporate bond purchases (CBPS) unchanged at GBP435bn and GBP10bn, respectively. We do not expect any changes to the Term Funding Scheme (TFS) either.

We expect BoE to maintain its neutral stance by repeating it can move 'in either direction'.

We still expect the BoE to remain on hold for the next 12 months. While we think it is unlikely the BoE will tighten monetary policy in a time of elevated political uncertainty, we think we need to see substantially slower growth and/or higher unemployment before easing becomes likely again. Also, BoE Governor Mark Carney has said that one of the reasons the UK has been resilient to Brexit uncertainties so far is due to the significant monetary easing from the BoE.

Note that the BoE reaction function has changed since the financial crisis: BoE puts more weight on growth/unemployment relative to inflation (see also a speech by former Monetary Policy Committee member Martin Weale here, 18 July 2016). In our view, BoE seems to be more worried about slower growth than too-high inflation if this is only temporary.

EUR/GBP has reached our 1-3M target of 0.87 and we are currently reviewing our forecast. We still see risks skewed to the upside for EUR/GBP in the coming months ahead of and after the triggering of Article 50.

Three main triggers for BoE

The summary of the last BoE meeting contains three main triggers for changes to the BoE's current monetary policy stance.

1. CPI inflation.
2. Wage growth.
3. Private consumption.

Higher CPI inflation and/or higher wage growth than currently expected would increase the likelihood of a hike.

Slower private consumption growth than expected would increase the likelihood of a cut.

Markets price in a small probability of a hike already this year

First full BoE hike priced in by summer 2019

Softer BoE pricing in recent months

BoE February projections

BoE expects CPI inflation to move higher from here

In the latest inflation report, BoE projected CPI inflation to increase significantly from here due to the weaker GBP, which has pushed up import prices.

It expects inflation to peak around 2.8%.

BoE expects the overshooting of inflation to be temporary, i.e. it expects inflation to fall back to 2% beyond the forecast horizon.

Inflation expected to move above the 2% target

BoE expects GDP growth to slow in coming years to around 1.5%

BoE projects GDP growth to slow in coming years due to

1. slower private consumption growth
2. slower business investments.

We are more pessimistic on GDP growth than the BoE.

BoE still expects growth to slow

BoE expects unemployment rate to stabilise above NAIRU

The BoE no longer expects the unemployment rate to rise significantly as in previous inflation reports.

One reason is that BoE has revised down its NAIRU estimate from 5.0% to 4.5%, i.e. there is currently more slack left in the labour market than previously estimated.

BoE has lowered its NAIRU estimate from 5.0% to 4.5%

Macro charts

GDP growth has been resilient to Brexit uncertainties

GDP growth continued at same pace in H2 16…

… but growth seems to have slowed in Q1 17

PMIs suggest Q1 GDP growth in the range of 0.3%-0.4% q/q

PMI composite has fallen but is still strong

Unemployment rate has stabilised at low levels

Inflation expected to rise supported by weak GBP

CPI inflation set to increase to close to 3%

Weaker GBP implies higher import prices

End of food and energy deflation

Higher food prices

Gasoline prices have stabilised

Inflation expectations have rebounded

Inflation expectations have risen significantly

Daily Pivots: (S1) 0.8713; (P) 0.8747; (R1) 0.8804; More...

EUR/GBP retreats sharply today but stays above 0.8704 minor support so far. Intraday bias remains on the upside for the moment. Rise form 0.8402 is expected to target 0.8851 resistance and above. Nonetheless, actions from 0.8303 are seen as the second leg of the corrective pattern from 0.9304. Hence, we'd expect strong resistance from 100% projection of 0.8303 to 0.8851 from 0.8402 at 0.8950 to limit upside. On the downside, below 0.8704 minor support will turn bias neutral and bring retreat before staging another rally.

In the bigger picture, price actions from 0.9304 are viewed as a medium term corrective pattern. Deeper fall cannot be ruled out yet. But we'd expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside. Overall, the corrective pattern would take some time to complete before long term up trend resumes at a later stage. Break of 0.9304 will pave the way to 0.9799 (2008 high).