USD/JPY likely to trade around 114 by mid-2017, says Lloyds Bank

The USD/JPY pair continued its rally from its post U.S. election low around 101, trading as high as 118.50 throughout December. Three factors have underpinned this move. Firstly, the hawkish outlook of interest rate from the U.S. Fed, as seen by the ‘dot plot’ indicating three hikes for 2017, noted Lloyds Bank in a research report.

Secondly, the upbeat assessment of the policy agenda of the U.S. President-Elect Trump, added Lloyds Bank. So far, the market might have concentrated more on the outlook of an expansionary fiscal package, probably overlooking his possibly protectionist stance. And thirdly, the continuous rally in global equity markets that have underpinned risk appetite.

“We believe the market pricing for US rates and the outlook for Trump are relatively ambitious, and therefore expect a broad-based pullback in the USD”, stated Lloyds Bank.

Also , the seismic shift in JPY positioning since September has seen JPY shorts extend to their most extreme level since 2014. This probably restricts additional JPY weakness in the medium term, especially given how far the USD/JPY pair is from its anticipated fair value.

“While further momentum and sentiment driven upside in USD/JPY cannot be ruled out in the short term, we see asymmetric risks for the pair. As such, we forecast 114 for mid-2017 and 112 for year-end”, added Lloyds Bank.