Citi Sees EUR/JPY Falling Below ¥175 Amid Rising Interest Rates

Citi analysts expect the EUR/JPY currency pair to decline in the coming months despite a possible near-term rebound. The bank believes that the pair has formed its long-term ceiling this spring, with rising Japanese real interest rates shifting its dynamics.

This shift is driven by a slowdown in Japanese equity gains, which has led to a correction towards the absolute interest rate spread. Citi notes that any regime change for EUR/JPY depends on a corresponding shift in market conditions, which appears increasingly likely.

The bank's base case scenario projects EUR/JPY at around ¥181 per euro by December before falling below ¥175 per euro in the first half of next year. However, Citi identifies a major correction in Japanese equities as a risk scenario that could expose unexpected downside fragility for EUR/JPY.