EUR/JPY Fundamental Forecast – July 6, 2016

The EUR/JPY dipped 67 points to 113.75 as the euro eased this morning ahead of Mario Draghi and increased worries about the Brexit negotiations while the yen increased on safe haven moves.  Brexit is starting to fade as a driver with nerves soothed by promises of more stimulus from the Bank of England and talk of UK corporation tax cuts to offset the shock of leaving the EU.

The clear fallout from Brexit is that investors no longer expect the Federal Reserve to hike US interest rates this year, while other major central banks are seen poised to ease policy further.

Highlighting the theme of lower rates for longer, US Treasury yields plunged on Friday with the benchmark 10-year briefly reaching a four-year trough of 1.382 percent, before closing at 1.461 percent.

Japanese companies have reportedly slashed their forecasts for inflation for five years’ time, lessening the chances of Bank of Japan Governor Haruhiko Kuroda meeting the 2 percent inflation target in the next fiscal year as he had forecast.

According to reports, the companies expect 1.1 percent of inflation in five years and an average rise of 0.7 percent in consumer prices in a year’s time, seeing a 0.1 percent retreat from three months ago.

It was added that business confidence and sentiment remained somewhat lackluster in the second quarter.

This reportedly lead to growing speculations that the Bank of Japan will roll out more stimulus measures to underpin the economy and knock the edge off the Japanese Yen’s strength.

The Bank of Japan is reportedly facing challenges in achieving its target, choosing to flood the economy with cash to prompt companies and households into spending now on expectations of future price rises.

Further, Junichi Makino, chief Japan economist at SMBC Nikko Securities reportedly said, “There is no sign of inflation… Kuroda will continue to be under pressure to ease more,” as recent economic data displayed little signs of improvement

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