Global macro overview for 02/10/2017:
The global monetary policy changed dynamically in September, which brought the crystallization of the trend, that is beginning to follow more and more leading central banks. Monetary policy-makers are tired of prolonged inflationary pressures, which in normal circumstances would justify departing from ultra-soft policies introduced during 2007 crisis. While economic activity is more than satisfactory and the labor market is healthy, economists still can not see a revival in wage growth and stimulation of inflationary pressures. On the other hand, the long-term maintenance of record low-interest rates has led to a dangerous situation on the credit and real estate market. Now impatient central bankers prefer to risk that inflation will eventually move up in the future, than to protect against the uncertain effects of the overturning households and businesses and bubble in the real estate market. Central banks are moving into action, but not all and not at the same pace. From the point of view of the foreign exchange market, this means changes in the pattern that the currency has stronger support in market interest rates.
In September, surprising decisions were made by the Bank of Canada and the Bank of England, which resulted in CAD and GBP rally. The European Central Bank will support EUR when the monetary policy changes in the near term (asset purchase reducing program) and FED keeps hiking the interest rates on a steady pace. Moreover, ECB activity will prompt Norges Bank and Riksbank to normalize the monetary policies, so NOK and SEK should get stronger in the near term. At the opposite extreme are the Bank of Japan and the Swiss National Bank, which are not even interested in further weakening the domestic currency.
In conclusion, September was a surprising month for market participants and there are clear clues, that the monetary stance triggered last month will be continued to the end of the year and might even intensify at the beginning of 2018.
Let's now take a look at the USD/JPY technical picture on the H4 time frame. The price is still hovering around the 78%Fibo at the level of 112.95, but the upward momentum is decreasing. The bounce from technical support at the level of 112.19 did not result in new local highs, so the odds for a further downside correction are rising. Breakout below the violet trend line will result with a drop towards the next technical support at the level of 111.45.
