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EUR/USD could climb back toward its summer highs near 1.17 if next week’s Federal Reserve decision sparks a “sell the news” reaction in the U.S. dollar, according to Citi strategists. However, geopolitical tensions and elevated energy risks could limit the dollar’s downside.
Currency markets are facing mixed signals as investors weigh interest-rate expectations against geopolitical uncertainty and the global energy shock. Rates markets have continued to price higher terminal interest rates across major economies, while economic growth has remained relatively resilient. Strong investment tied to artificial intelligence has also helped support global demand.
Citi sees a “dovish hike” from the Federal Reserve as the most likely scenario at its upcoming policy meeting. Such an outcome could pressure the U.S. dollar in the short term, particularly if traders use the announcement as an opportunity to take profits following the currency’s recent strength.
Despite the near-term downside risk, Citi maintains a more constructive six-to-12-month outlook for the dollar. Attractive U.S. real interest rates and persistent geopolitical risk premiums could support demand for the greenback and prevent a deeper decline.
The euro faces its own challenges. Recent European Central Bank policy developments have highlighted how energy prices and geopolitical risks can weaken the traditional relationship between interest rates and currencies. As a result, even a hawkish ECB stance may not be enough to sustain significant euro appreciation if geopolitical concerns remain elevated.
EUR/USD recently stood at 1.1599, down 0.09%. From a technical perspective, the currency pair has established support around 1.1575. That level previously marked the high following the post-Liberation Day rally and has since become an important pivot within the pair’s roughly 1.14-to-1.18 trading range over the past year.
As long as EUR/USD remains above 1.1575, Citi sees the near-term risk-reward balance favoring further gains. If the Fed decision encourages investors to sell the dollar, the euro could retest the 1.17 area, although geopolitical and energy-market pressures may cap further upside.
