EUR/JPY Seen Falling Below ¥175 as Japan's Interest Rates Rise

Citi analysts expect the EUR/JPY currency pair to decline over the coming months despite a possible near-term rebound. According to Citi, the pair likely reached its long-term ceiling this spring due to rising Japanese real interest rates driven by a slowdown in Japanese equity gains.

Rising Japanese real interest rates have shifted the dynamics of the EUR/JPY pair, leading to a correction towards the level of the absolute interest rate spread. Citi notes that any regime change for EUR/JPY depends on a corresponding shift in market conditions, which now appears increasingly likely.

The bank's base case scenario projects EUR/JPY at around ¥181 per euro in December before falling below ¥175 per euro in the first half of next year. Citi assumes current market conditions persist for this timeline.