USD/JPY pair likely to decline towards 105 in medium term, says Lloyds Bank

The Japanese currency continues to fluctuate within its wide 108 to 115 medium-term range. The Japanese yen tested the upper bound in mid-July, before falling sharply, back towards 110, noted Lloyds Bank in a research report. Monetary policy developments continue to be a main driver of the USD/JPY pair. The U.S. Fed’s use of more ‘dovish’ language after lacklustre inflation releases has exerted pressure on the USD.

Despite the slight change in tone, the FOMC is expected to start reducing the size of the balance sheet and hike rates again one more time in 2017. On the contrary, the monetary policy of Japan is likely to stay on its current course until there is larger conviction that inflation would reach the BoJ’s target rate of 2 percent.

Given the potential policy paths, there is scope for additional interest rate divergence. Yet, other factors are expected to pull the currency pair in the opposite direction. The deepening investigation into the Trump administration’s links to Russia has increased the uncertainty clouding the White House. Notable short Japanese yen positioning is expected to further restrict USD/JPY upside and, based on a variety of metrics the Japanese Yen is considered undervalued. Thus, the USD/JPY pair is expected to decline. According to Lloyds Bank, the pair is likely to decline towards 105 in the medium term.

At 22:00 GMT the FxWirePro's Hourly Strength Index of Japanese Yen was neutral at -36.1607, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bearish at -56.0505. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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