Fed Decision Could Send EUR/USD Back to Summer Highs

Citi strategists believe that if the Federal Reserve's upcoming decision triggers a 'sell the news' reaction in the dollar, the EUR/USD pair could move back towards its summer highs near 1.17.

However, geopolitical and energy risks may limit the greenback's downside, as they have complicated the signals coming from relative interest rates. Central bank responses to the energy shock and changes in countries' terms of trade can pull currencies in different directions.

A 'dovish hike' from the Fed is seen as the most likely outcome next week, which could weigh on the dollar tactically if traders respond by selling the currency following the decision.

Despite this, persistent geopolitical risk premiums and attractive U.S. real interest rates could limit the scale of any dollar decline, suggesting a more constructive six-to-12-month outlook for the U.S. currency compared to the shorter-term view.