EUR/USD could retest 1.17 after Fed decision - Citi says

The Federal Reserve's upcoming decision may cause the EUR/USD exchange rate to revert to its summer peak near 1.17, according to strategists at Citi. However, geopolitical and energy market risks could curb the dollar's downward movement. This outlook is based on the complex interplay of geopolitical factors and energy markets influencing the signals derived from interest rate differentials.

Central banks' reactions to energy shocks and shifts in countries' trade terms are causing currencies to behave unpredictably. The rates market has been pricing in higher terminal interest rates across major economies. Despite the energy shock, global economic growth has been robust, and artificial intelligence-driven investment is fueling demand.

A dovish shift in the Fed's stance is considered the most probable outcome next week. Such a move could be tactically disadvantageous for the dollar if traders sell following the decision. Nonetheless, ongoing geopolitical risks and the U.S.'s competitive real interest rates may limit the extent of the dollar's drop. This analysis suggests a more favorable outlook for the U.S. currency over the next six to twelve months compared to the short term.

Regarding the euro, recent European Central Bank policies demonstrate how energy and geopolitical events can complicate the typical relationship between interest rates and currencies. A hawkish ECB alone might not yield sustained euro gains if geopolitical concerns persist. From a technical viewpoint, EUR/USD has found support near 1.1575, a level that previously served as a high following the post-Liberation Day rally and has acted as a key pivot within the pair's fluctuating range between 1.14 and 1.18 over the past year.

Maintaining an above 1.1575 position could tilt the risk-reward ratio slightly in favor of further gains, although geopolitical pressures might hinder the upside. If market participants view the Fed's decision as a chance to capitalize on recent dollar strength, it could prompt EUR/USD to retreat towards the summer highs around 1.17.