Citi Forecasts EUR/JPY to Fall Below ¥175, Citing Shifting Fundamentals

The euro is poised to weaken against the Japanese yen over the next several months, with analysts at Citi projecting the currency pair will fall below the ¥175 mark. This outlook holds even as the bank acknowledges the possibility of a short-term rally in the interim.

Citi's Forecast

In a recent research note, Citi laid out its base-case scenario for the EUR/JPY pair, forecasting a decline to around ¥181 by December. The bank anticipates further weakness into next year, with the exchange rate expected to break below ¥175 during the first half.

Despite the bearish medium-term outlook, strategists noted that a near-term rebound to the ¥183 level is possible before the broader downtrend resumes. Citi's projections are based on the continuation of the current market environment.

Key Drivers for the Bearish View

According to Citi, the fundamental drivers for the currency pair are shifting, and it likely established a long-term peak this past spring. The bank believes a correction process has begun, pulling the exchange rate back toward levels more aligned with absolute interest rate differentials.

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This shift is underpinned by several key factors:

• A slowdown in the rally for Japanese equities.
• A continued rise in Japan's real interest rates.
• An increasing likelihood of a corresponding downward move in the USD/JPY pair, which Citi sees as a crucial catalyst for a true trend reversal in EUR/JPY.

A Note on Risk

Citi also outlined a potential risk scenario for the pair. The bank warned that if Japanese stock markets were to undergo a significant correction, the EUR/JPY could exhibit "unexpected downside vulnerability," potentially leading to a sharper fall than the base case predicts.