Citi Warns Euro Rallies Could Fade if Warsh Turns Dovish
Citi does not expect the Federal Reserve to deliver a sufficiently hawkish surprise to push the US dollar beyond its 12-month trading range. This week’s Federal Open Market Committee meeting will be the first chaired by new Fed chief Kevin Warsh.
Markets Already Expect a Hawkish Fed Statement
Investors are already preparing for a relatively hawkish policy statement and updated Summary of Economic Projections.
According to Citi, the Fed could remove its easing bias from the statement. Officials may also raise their core Personal Consumption Expenditures inflation forecast.
Meanwhile, the median interest-rate projection could indicate no policy change during 2026. Citi believes one or two policymakers might even signal support for another rate increase, although it considers that an alternative scenario rather than its central forecast.
However, these adjustments may produce only a limited reaction in the foreign exchange market because traders have already priced in much of the expected policy shift.
Warsh’s Press Conference Could Drive the Dollar
Citi believes the main source of uncertainty will be Warsh’s comments during the post-meeting press conference.
Markets currently price in approximately 18 basis points of interest-rate increases before the end of the year. Traders also expect the first full rate hike to arrive by March 2027.
Warsh’s response to those expectations could therefore determine the immediate direction of the dollar.
Citi expects him to avoid making firm commitments. His preference for providing less forward guidance could result in deliberately unclear answers about the future path of monetary policy.
Iran Deal and Softer Inflation Could Support Risk Assets
A possible agreement between the United States and Iran, together with weaker Consumer Price Index data, could allow the Fed to look beyond short-term increases in goods and energy prices.
Citi also noted that many investors have already closed their long-dollar positions. In addition, the US Dollar Index is trading close to what the bank considers fair value.
As a result, any initial dollar decline following the FOMC decision could remain limited.
The growing possibility of an Iran agreement may also reduce concerns about commodity-driven inflation. Citi expects Warsh to highlight this development as a reason for the Fed to remain patient.
Combined with a neutral message from the Fed chair and the successful major initial public offering held last week, these conditions could stabilize risk sentiment and support a broader market rally.
Citi Favors Carry Trades Funded With Euros and Canadian Dollars
If market risk appetite improves, Citi expects investors to return to carry trades.
The bank prefers financing these positions through the euro and Canadian dollar. This approach involves borrowing or selling lower-yielding currencies to gain exposure to assets offering stronger potential returns.
Citi Maintains Bearish EUR/USD Forecast
Citi continues to expect EUR/USD to decline toward 1.14 over the medium term. The currency pair could temporarily fall below that target if selling pressure accelerates.
The bank’s outlook is based mainly on differences in economic growth between the United States and other major economies.
However, clearer evidence that short-term global bond yields have peaked may be required before the currency pair begins a sustained decline. Easing geopolitical tensions could help create those conditions.
EUR/USD Resistance Creates a Selling Opportunity
In the near term, Citi recommends using any dollar weakness surrounding the FOMC meeting to increase short positions in EUR/USD.
The bank is particularly focused on the 1.1660 to 1.1680 resistance zone. This area is close to the 200-day moving average and several technical levels that have previously influenced the currency pair.
Therefore, Citi believes temporary euro rallies toward this resistance range could offer traders an opportunity to position for another EUR/USD decline.
