USD/JPY likely to trade around 108 by end-2018 and 103 by end-2019 – Lloyds Bank

The Japanese yen has consolidated around 110 against the U.S. dollar. The USD/JPY’s correlation with US yields continues to be high. U.S. monetary policy and geopolitical developments would be important for the currency pair in the year ahead. The trade war between China and the U.S. has heightened in the last month, and the risk of additional tensions continues.

The latest U.S. labor market report indicated another above average rise in employment and firm wage growth. This vindicates the U.S. Fed’s decision to adopt a more ‘hawkish’ policy stance, noted Lloyds Bank. Based on the restricted spare capacity available and possibility of solid performance of the U.S. economy this year and next year, a further 50 basis points of tightening in 2018 is justified, stated Lloyds Bank.

The ‘dot-plot’ shows likelihood of additional 75 basis points hike in 2019, which is considerably ahead of current market projections. On the contrary, the Bank of Japan is expected to keep monetary conditions extremely accommodative in the medium term. But with U.S. interest rates expected to reach a ‘neutral’ setting in 2019, they might have an increasingly limited ability to drive the currency pair higher.

“As such, we believe the risks for USD/JPY are skewed to the downside, particularly if global tensions increase. We forecast USD/JPY at 108 at end-2018 and 103 at end-2019”, added Lloyds Bank.

At 19:00 GMT the FxWirePro's Hourly Strength Index of Japanese Yen was highly bearish at -138.253, while the FxWirePro's Hourly Strength Index of US Dollar was bullish at 88.4502. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex