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Analysts at Danske Bank, expect the EUR/JPY pair to remain range bound near term, but to gradually recover in the medium-term, supported by divergence between the European Central Bank and the Bank of Japan. They also warn about the fragile risk environment and stretched short JPY positioning, could create headwinds in the near term for the EUR/JPY.

Key Quotes:  

“The Bank of Japan (BoJ) continues to emphasise its willingness to keep monetary policy accommodative and we expect no changes before the end of 2019 at the earliest. However, its actions are starting to look contradictory as, in our view, slowing monetary growth will not bring the BoJ closer to its inflation aim. Furthermore, it could start to become a JPY positive.”

“During the recent selloff in equity markets, the JPY did see some temporary safe-haven demand. FX positioning remains stretched short JPY and given the overall fragile risk environment, the JPY could see renewed support if negative sentiment returns.”

“In the medium term, we expect EUR/JPY to gradually recover supported by the ECB-BoJ divergence, continued solid global growth outlook and continued portfolio outflows out of Japan. We target EUR/JPY at 135 in 6M and 144 in 12M.”