EUR/USD May Test 1.17 After Fed Decision, Citi Strategists Say

The euro could retest its summer highs against the dollar following the Federal Reserve's upcoming interest rate decision, according to strategists at Citigroup. However, they caution that geopolitical risks and energy market uncertainty are likely to limit the US dollar's potential downside.

'Sell-the-Fact' Dollar Risk

Citi's analysis suggests a "sell-the-fact" reaction could pressure the dollar in the immediate aftermath of the Fed's announcement. Markets widely expect a "dovish hike," an outcome that may already be priced in, potentially leading traders to unwind long-dollar positions once the news is confirmed.

Should this scenario unfold, the EUR/USD exchange rate could rally toward the 1.17 level, a high seen earlier in the summer, the strategists noted. This contrasts with the bank's more constructive medium-to-long-term outlook for the dollar.

Geopolitical and Yield Headwinds

Despite the potential for a short-term pullback, Citi maintains a relatively optimistic view on the dollar over a 6-to-12-month horizon. This outlook is underpinned by a persistent geopolitical risk premium and attractive real interest rates in the United States, which could constrain any significant dollar depreciation.

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The strategists highlighted that complex dynamics in geopolitics and energy markets are disrupting the typical relationship between interest rate differentials and currency values. For the euro, this means even a hawkish stance from the European Central Bank may not be enough to fuel a sustained rally if external risks remain elevated.

Key Technical Levels

From a technical perspective, Citigroup identified a key support level for EUR/USD around 1.1575. This price point has served as a significant pivot for the pair over the past year.

As long as the currency pair remains above this threshold, the bank's analysis suggests the near-term risk-reward balance is tilted toward the upside. Still, any gains may be capped by the broader macroeconomic and geopolitical environment.