Original article by Citi via Futunn News: “Citi Expects USD/JPY to Drop Below the 140 Mark”
Title: Citi Predicts USD/JPY Could Weaken Below 140: Market Forces, Central Bank Strategies, and Outlook
In a recent research note highlighted by Citi, analysts foresee a potential decline in the U.S. dollar to Japanese yen (USD/JPY) exchange rate, suggesting that the pair could fall below the crucial 140.00 threshold. This valuation outlook is based on multiple driving forces within macroeconomic and monetary policy developments.
Citi’s updated forecast reflects growing expectations regarding policy divergence between the Federal Reserve and the Bank of Japan (BOJ), evolving inflation dynamics, and global risk sentiment. The following is an in-depth analysis of the factors influencing USD/JPY, including market fundamentals, technical trends, and central bank policies.
Key Highlights
– Citi expects USD/JPY may dip below the 140 level in the near-to-medium term
– Slowing U.S. inflation and shifting Federal Reserve policy could pressure the dollar
– The BOJ’s approach to monetary tightening remains cautious but may begin to evolve
– Market volatility, geopolitical risks, and investor sentiment are shaping currency flows
– Technical indicators suggest downside potential if the pair breaches support levels
Macroeconomic Drivers of USD/JPY Weakness
1. Shifts in U.S. Monetary Policy
– The Federal Reserve has entered a stage of policy normalization after an aggressive tightening cycle that spanned 2022 and early 2023.
– U.S. consumer inflation has shown signs of a consistent downward trend, prompting speculation that the Fed may pause rate hikes or even consider rate cuts if economic growth slows significantly.
– Fed officials have reiterated a data-dependent stance, and recent statements suggest a more cautious approach going forward.
– As real yields begin to narrow and the market adjusts to a less hawkish Fed, demand for the U.S. dollar may weaken, directly impacting USD/JPY exchange rates.
2. Japanese Monetary Policy Developments
– The BOJ has long maintained an ultra-loose policy framework, with continued usage of yield curve control (YCC) and negative interest rates.
– Japan has recently experienced upward pressure on inflation, with core consumer prices exceeding the central bank’s target.
– While the BOJ maintains that inflation is transitory, stronger domestic price pressures may push the bank toward a gradual normalization of policy.
– Increased market speculation about potential adjustments to the BOJ’s YCC or interest rate settings is creating expectations for a more supportive yen in the medium term.
3. Interest Rate Differentials Narrowing
– The yield gap between U.S. Treasuries and Japanese government bonds (JGBs) has played a crucial role in keeping USD/JPY elevated.
– A narrowing of rate differentials due to a dovish Federal Reserve and a potentially less accommodative BOJ would erode the dollar’s appeal over the yen.
– The carry trade—where investors borrow yen at low rates to invest in higher-yielding U.S. assets—may unwind, reducing demand for the U.S. dollar and further pressuring USD/JPY lower.
4. Declining Global Risk Appetite
– The prospect of a global economic slowdown has resulted in a cautious market tone, with increased interest in safe-haven assets like the Japanese yen.
– Ongoing geopolitical tensions, particularly in Eastern Europe and Asia, and concerns about recession in key economies have dampened investor risk appetite.
– During periods of heightened volatility, the yen tends to strengthen due to its liquidity, conservative nature in Japanese capital markets, and Japan’s positive net international investment position.
Technical Outlook and Key Support Levels
Citi’s technical analysis suggests that if USD/JPY breaks below 140.00, the pair could enter a more sustained downward trend.
Important technical levels to monitor:
– 140.00: A psychological and technical support level. A breach of this figure could initiate more aggressive selling.
– 137
Explore this further here: USD/JPY trading.