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• Japan is showing itself to be in good shape as the economic upswing is the longeststanding since the crisis.
• We expect growth to continue through fiscal 2017, supported by a very strong labour market, the global economic recovery and extremely accommodative economic policies.
• As fiscal stimulus wanes next year, we are likely to see growth rates return to lower levels around potential.
• Underlying price pressure remains very low. Higher inflation does not seem impending.

Strong momentum

The Japanese economy picked up speed in Q2 and grew at an annualised growth of 2.5% q/q. Thus, the economic upswing continued and the last six quarters now constitute the longest period of positive growth in Japan since before the crisis. According to Bank of Japan's TANKAN survey, businesses are turning increasingly upbeat, more companies have reported favourable conditions since Q2 16 and more companies are looking for favourable conditions in Q3. On the other hand, PMIs have decreased in July and August, particularly driven by the service sector, which could signal some slowdown in domestic demand. Manufacturing PMIs have also shown some signs of slowdown, which is also what we see in industrial production over the summer. Composite PMI now stands about one index point lower than Q2, which indicates a decrease in Q3 for the first time in 2017. PMIs thus point to some slowdown in GDP growth.

Growth was primarily driven by private consumption and investments in Q2. Looking back on the recent year, exports have been the key driver, though. We do expect more from private consumption going forward. Wage inflation remains stubbornly low but with a labour market that is turning increasingly hotter and unemployment that has fallen to even lower levels, total wage income is increasing, even if wages are not. We believe there is room for private consumption to continue contributing to growth. Consumer confidence has also remained upbeat over the summer, although it does look like some slowdown in private consumption in Q3. Both consumer surveys and auto sales have looked weak in August. Retail sales, on the other hand, was strong. We expect private consumption to stay on a positive trend but as long as wage increases remain depressed, it will probably be at a moderate pace.

On the private demand side, we have also seen a decent pick-up in investments recently. Both business and residential investments have been increasing since the current economic upturn began in Q1 16. Indicators are mixed, as housing starts decreased in July and businesses signal a slight increase in production capacity in Q3. Machinery orders, on the other hand, rebounded in July after a weak first half of the year. Looking beyond Q3, we expect the positive trend in business investments to keep up, as the output gap increases and labour becomes an increasingly scarce resource. At the same time, the Tokyo Olympics 2020 remains supportive for investments. Bank of Japan (BoJ) has estimated that investments in infrastructure, hotels, commercial properties, etc., amount to 1.3% of annual GDP spread out over the years 2014-2021.

Overall, exports have still been the main driver of the upturn, especially over the past year. Japan is particularly dependent on the US and China, which account for close to 40% of total exports. Particularly exports to China have been key, standing at close to 20% y/y in nominal terms, but also US demand has been strong. Whereas private demand could be slowing somewhat in Q3, exports have been strong and rebounded in July. An increasing share of companies are reporting excess demand in Q2 and expectations of the same in Q3. Japanese exporters strongly benefit from the global economic upturn and the relatively weak yen.

Stimulus in place but inflation remains stubbornly low

We expect monetary policy to remain extremely accommodative throughout the forecast period, which will also be supportive for demand, both domestically and abroad. BoJ has pledged to hold measures in place until the 2% inflation target is reached. Inflation has been increasing through 2017, but mainly due to rising energy prices. Underlying price pressure in Japan remains very low and BoJ's inflation target is currently nowhere within reach. Almost three decades of very low inflation mean companies are reluctant to raise prices and try to cut back on services and streamline their operations instead of raising wages. Low worker mobility and a preference for job security over wage increases are big obstacles for wage inflation.

Public spending is also set to remain supportive for the economy through the fiscal year 2017, which runs from Q2 17-Q1 18. We expect to see GDP-growth around 2% q/q annualised through the rest of fiscal 2017 and a significant slowdown in fiscal 2018 when stimulus starts to wear off.

EUR/USD - 1.1977

Most recent candlesticks pattern   : N/A

Trend                      : Up

Tenkan-Sen level              : 1.1962

Kijun-Sen level                  : 1.1988

Ichimoku cloud top             : 1.2031

Ichimoku cloud bottom      : 1.2004

Original strategy  :

Bought at 1.1985, stopped at 1.1950

Position : - Long at 1.1985

Target :  -

Stop : - 1.1950

New strategy  :

Stand aside

Position : -

Target :  -

Stop : -

Although the single currency recovered after falling to 1.1947 and test of the Kijun-Sen (now at 1.1988) cannot be ruled out, reckon upside would be limited to the lower Kumo (now at 1.2004) and bring another decline later, below said support at 1.1947 would extend the fall from 1.2093 top to 1.1926-29 (61.8% Fibonacci retracement of 1.1823-1.2093 and previous support) but reckon 1.1900 would hold on first testing.

In view of this, would be prudent to stand aside for now. Above the lower Kumo (now at 1.2004) would bring test of the upper Kumo (now at 1.2031) but a sustained breach above there is needed to signal the fall from 1.2093 has ended and bring a stronger rebound to 1.2050-55 first.

Cable regains traction and emerges above thick hourly cloud, in renewed attempt again at1.3200 barrier, following yesterday's repeated rejection at 1.3222 and daily close in red, the first after four consecutive strong bullish days.

Overall structure remains firmly bullish while the price holds above daily cloud top (1.3075) and sees scope for final push towards key barrier at 1.3268 (03 Aug peak).

UK CPI data are in focus today and may boost pound further if release comes at/above forecast at 2.8% for August (vs 2.6% in July).

Sustained break above 1.3268 (also 2017 high) would open way towards 1.3473 (weekly cloud top/50% retracement of larger 1.5016/1.1930 descend).

Conversely, weaker than expected inflation numbers could spark fresh weakness through 1.3159 (lows of today/Monday) and risk retest of daily cloud top.

Res: 1.3203, 1.3224, 1.3268, 1.3300
Sup: 1.3159, 1.3093, 1.3075, 1.3046

USD/JPY - 109.55

Most recent candlesticks pattern   : N/A

Trend                      : Down

Tenkan-Sen level              : 109.44

Kijun-Sen level                  : 108.96

Ichimoku cloud top             : 108.22

Ichimoku cloud bottom      : 108.15

Original strategy  :

Sold at 109.35, Target: 108.35, Stop: 109.70

Position :  - Short at 109.35

Target :  - 108.35

Stop : - 109.70

New strategy  :

Hold short entered at 109.35, Target: 108.35, Stop: 109.70

Position :  - Short at 109.35

Target :  - 108.35

Stop : - 109.70

Although the greenback has continued edging higher today and marginal gain from here cannot be ruled out, loss of near term upward momentum should prevent sharp move beyond 109.70 and bring retreat later, below the Kijun-Sen (now at 108.96) would suggest an intra-day top is formed, bring weakness to 108.60-65, break there would add credence to this view, then test of the Ichimoku cloud (now at 108.15-22) would follow but downside should be limited to 107.85, bring rebound later.

In view of this, we are holding on to our short position entered at 109.55. Above 109.70 would defer and signal low has been formed, bring a stronger rebound towards resistance at 109.93 but reckon 110.20 would hold from here due to near term overbought condition.

USDJPY (109.34): The USDJPY recovered sharply off the support level at 109.15 - 108.26, rising to post a 4-day high. In the near term, USDJPY could be seen falling back to retest the support level at 108.64 - 108.26. Establishing support here could shift the bias to the upside with price action likely to push towards 111.00. Alternately, to the downside in the event that the support fails, we could expect USDJPY falling back to the previous lows formed near 107.60.

GBPUSD (1.3178): The British pound remains bullish as price action remains flat above 1.3150 level. The currency pair gave up some of the gains yesterday. The rally to 1.3200 marks a test of the trend line break out following establishing support at 1.2847. Further gains could be seen coming as GBPUSD could potentially be testing 1.3236 resistance level. To the downside, minor support has been formed at 1.3161. Therefore, a breakdown below this support level could signal near-term declines. The correction could potentially push the cable down to the pending support level at 1.2980.

EURUSD (1.1959): The EURUSD extended declines sharply yesterday as price action fell to the minor support level at 1.1962. The common currency was seen posting a reversal off this level. The bias remains balanced at the moment although there is a strong chance that price action could be setting up for a bullish breakout. Resistance at 1.2058 remains the key level for the EURUSD. The current price action also signals a potential cup and handle pattern that could be forming in the near term. However, should prices continue to decline, the bullish bias in the EURUSD could ease as price is likely to fall to the next support level at 1.1882.

The US dollar was seen recovering on Monday as geopolitical tensions eased pushing risk appetite higher. The US dollar index, which was seen trading below 91.85, was seen attempting to pull back higher after the index filled the gap from December 2014. The lack of economic data saw the markets taking cues from the global developments.

On the economic front, data yesterday saw Canada's housing starts rising 223k on the month, beating estimates of 216k and accelerating slightly higher from the previous month.

Looking ahead, the UK's inflation data will be main focus today. According to the estimates, consumer prices in the UK are forecast to accelerate 2.8% in August, up from 2.6% in July. Core consumer prices are also expected to rise 2.5%, slightly up from 2.4% previously. The data marks the start of a busy week for the British pound which will also include the UK parliamentary vote on Brexit as well as wage data and the BoE's meeting.

The single currency continues to correct lower against the greenback, with the EURUSD pair moving below its 100-hour moving average, and reaching an intraday low of 1.1945, during the Asian trading session.

Price-action on the EURUSD suggests further intraday weakness remains possible, will sellers likely to target the euro's monthly time frame, 50-period moving average, located at 1.1871.

The EURUSD remains bearish on an intraday basis whilst trading below the pairs weekly pivot point, at 1.1999. Only a higher time-frame price close below the 1.1660 level can negate the euro's bullish medium-term outlook.

Key intraday technical support is located at the 200-hour moving average, at 1.1938, and the September 7th price low, at 1.1914.

To the upside, key intraday technical resistance for the EURUSD pair is located at 1.1962, 1.1979 and 1.1999. Above the 1.1999 level, further resistance is found at the former swing price high at 1.3039.

The USDJPY pair has moved to a four-day trading high, hitting 109.58 during the Asian trading session, as yesterday's risk-reversal in broader markets continues, helping to boost the U.S dollar index.

Going forward, the USDJPY pair may now start to target the gap created on the price charts, on the September 1st market open, which is currently located just above the psychological 110 level, at 110.07.

The USDJPY remains bullish on an intraday basis, while trading above the weekly pivot point, at 108.37. The recent correction in the pair may be largely technically driven, as U.S fundamentals remain weak.

Key intraday technical resistance can be found at 109.80, the 50-day moving average, at 110.07, and the July 31st swing high, at 110.67.

Key intraday USDJPY technical support is located at the 109.37, and the pairs 200-hour moving average, at 109.21.

Further technical support is found at the 109.00 level, which represents the 50 percent Fibonacci retracement of the 110.67 swing high, to the 107.31 swing low