Citi: EUR/USD Could Retest 1.17 on 'Sell the News' Dollar Reaction to Fed

The euro could challenge its summer highs against the U.S. dollar near the 1.17 level if the Federal Reserve's upcoming policy decision sparks a tactical sell-off in the greenback, according to strategists at Citi.

A 'Dovish Hike' Scenario

Citi's analysis suggests the most probable outcome from the Fed's meeting is a "dovish hike," which could weigh on the U.S. dollar in the short term. This scenario would involve the central bank raising interest rates as expected but signaling a less aggressive path forward, potentially triggering a "sell the news" reaction from traders who have already priced in a hawkish stance.

Such a tactical move could provide an opening for the EUR/USD pair to rally. However, the strategists caution that this view is primarily short-term, with other significant factors supporting the dollar over a longer horizon.

Geopolitical and Rate Headwinds

Several factors could limit the dollar's potential downside and cap the euro's gains, according to the note. Persistent geopolitical risk premiums and attractive U.S. real interest rates continue to support a more constructive outlook for the dollar over the next six to 12 months.

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For the euro, developments in energy markets and geopolitics are complicating the traditional relationship between interest rates and currency values. Citi noted that even a hawkish European Central Bank may not be sufficient to drive sustained euro appreciation if these broader concerns remain elevated.

Key Technical Levels

From a technical perspective, the EUR/USD has established significant support around the 1.1575 level. This price point, a former high, has since served as a key pivot for the currency pair, which has largely traded within a range of approximately 1.14 to 1.18 over the past year.

According to Citi, as long as the pair holds above the 1.1575 support, the near-term risk-reward balance is tilted toward further gains. A market interpretation of the Fed's decision that favors profit-taking on the dollar could be the catalyst to push the pair back toward the summer highs around 1.17.