Global macro overview for 29/09/2017

Global macro overview for 29/09/2017:

Catalonia's separatist government has called a referendum on leaving Spain for 1 October, which might create an increased volatility in financial markets over the weekend.

With a population of 7.5 million, its capital is the proud city of Barcelona, Catalonia is one of Spain's wealthiest and most productive regions and has a distinct history dating back almost 1,000 years. In November 2014, after having their autonomy watered down as well as by years of recession and cuts in public spending, Catalans held an unofficial vote on independence. The Spanish leadership has rejected the vote as illegal and the courts have ordered a halt. Nevertheless, after the Separatists won Catalonia's election in 2015 and set to work on holding a binding referendum, defying Spain's constitution, which states that Spain is indivisible. The confusion reigns before Sunday's vote provided that the Spanish government is trying to block the referendum claiming that it is illegal.

A Catalan referendum is an event risk that many market participants may want to avoid before the weekly closing bell. If the referendum is held as planned, the outcome could trigger some extreme price volatility in the Euro pairs on Monday open. If the majority of Catalan people decide to vote in favour of Catalan independence, the European integrity sentiment could be seriously affected, because some other countries might start to prepare for the same activity. The other important thing is the government's reaction, as violent mass protests, an armed police intervention, and overall political unrest could affect the positive Euro currency sentiment in the aftermath of the Sunday's referendum. On the other hand, a vote against the autonomy should lift the positive sentiment towards European integrity.

So far the financial markets reaction is limited as Spanish stock, bond and sovereign markets volatility did not increase. The reason might be quite simple: the market participants are not pricing in the risk yet and patiently waiting for the referendum outcome, which, in turn, means the referendum vote in underpriced.

Let's now take a look at the EUR/JPY technical picture at the H4 time frame before the Catalan referendum vote. The price is trading in a narrow range between the levels of 131.70 - 133.24 after a sudden drop from the local high at the level of 134.40. The most important technical support zone is between the levels of 132.01 - 131.39. Any violation of this area would immediately lead to further decrease towards the level of 130.61 and even 129.35.

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