EUR/JPY to trade between 127/131 - Danske Bank

Analysts from Danske Bank expected the EUR/JPY to trade at 128.80 in the next 1-3 months. From a fundamental perspective, they see the case for further gains intact. 

Key Quotes: 

"The JPY has weakened significantly over the past month, as the BoJ (in contrast to the ECB, BoC and Bank of England, which all recently changed their communication in a more hawkish direction) remains on easing bias and recently demonstrated its commitment to its yield curve control.”

“According to the latest IMM data, non-commercial JPY positioning is now back in stretched short territory, suggesting that the JPY sell-off is likely to lose momentum in the short term. However, we expect the JPY to continue to underperform vis-à-vis the USD and EUR in a scenario with rising global yields and, given the relatively soft pricing of the Fed, both in terms of rate hikes and balance sheet reduction, we expect relative monetary policy to support USD/JPY in coming months, targeting the cross at 114 in 1-3M.”

“In respect of EUR/JPY, we expect the cross to trade in the range of 127-131 in the coming months, targeting 128.8 in 1-3M. We expect the ECB to deliver only a minor hawkish twist at its July meeting, which, if anything, could add to the upside risks for EUR/JPY.”

“Longer term, we expect EUR/JPY to continue higher driven by real interest rates and portfolio outflows out of Japan, as we expect the ECB to move towards monetary policy ‘normalisation’ before the BoJ. We target EUR/JPY at 133.4 in 6M and 136.88 in 12M. According to Danske Bank’s MEVA model, EUR/JPY still trades below the model’s fair value of 133. Hence, from a fundamental point of view, the case for further EUR/JPY gains remains intact for now.”