FXStreet (Edinburgh) - Morten Helt, Senior Analyst at Danske Bank, believes the pair could climb to the area of 110.00 in the next 6 months.

Key Quotes

“GDP in Q2 contracted sharply by 6.8% q/q ann. after expanding 6.1% q/q ann. in Q1”.

“The details were relatively weak but the sharp contraction in Q2 is to some degree due to temporary factors, as a lot of private consumption has been frontloaded ahead of the tax rise and we expect Japan to return to positive growth in Q3”.

“Nonetheless, the data suggests that the net negative impact from the consumption tax rise was substantial and has been larger than in 1997, when Japan also raised the consumption tax, which suggests that the consumption tax hike in April will not prove to be a cakewalk for the economy”.

“In our main scenario, we believe the BoJ will expand its monetary base target in October this year by another JPY10-15trn”.

“As the first Fed hike continues to move closer as time goes by, we still expect USD/JPY to trade higher towards 110/114 in 6/12M supported by divergent monetary policy”.

“While geopolitical turmoil and negative sentiment on global equity markets in the short term might keep USD/JPY caught within the past six-month range of 104.13-100.76, we see an increased likelihood of a new trend higher in the cross driven by renewed speculations on additional BoJ easing”.

“Especially the sharp contraction in Q2 GDP and a likely decline in Japanese inflation in the coming months could trigger speculation”.

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