Citi Strategists See EUR/USD Retesting 1.17 on Potential 'Sell the News' Fed Reaction

The EUR/USD currency pair could rally toward the 1.17 level if the Federal Reserve's upcoming policy decision prompts a "sell the news" reaction in the U.S. dollar, according to an analysis by Citi strategists.

The 'Dovish Hike' Scenario

Citi's outlook is based on the view that a "dovish hike" is the most probable outcome from the Fed's next meeting. Such a move, where the central bank raises rates but signals a less aggressive future path, could lead traders to take profits on the dollar's recent strength.

This tactical selling pressure on the greenback could provide a tailwind for the euro. However, Citi notes that any dollar decline may be limited due to several underlying factors supporting the U.S. currency over a longer-term horizon.

Geopolitical and Rate Headwinds

Strategists caution that persistent geopolitical risk premiums and attractive U.S. real interest rates could cushion any significant dollar downside. These elements contribute to a more constructive six-to-12-month outlook for the dollar, even if it weakens in the immediate aftermath of the Fed meeting.

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For the euro, the European Central Bank's own hawkish policy may not be sufficient to drive sustained gains. Citi highlighted that the ongoing energy shock and geopolitical tensions can disrupt the typical relationship between interest rate differentials and currency movements, potentially capping the euro's upside.

Key Technical Levels

From a technical standpoint, the EUR/USD pair has established significant support around the 1.1575 mark. This level has served as an important pivot point within the currency's broad 1.14-to-1.18 range over the past year.

According to Citi, as long as the pair holds above this 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 send EUR/USD back toward its summer highs near 1.17.