EUR/USD: Any pullback is a buying opportunity- Citi

Citi expects the Federal Reserve to hold rates steady at its upcoming meeting, with market focus on the SEP and Powell's press conference. The bank sees "asymmetric bullish risk" for the USD, advising investors to view any dollar strength as an opportunity to add to short positions, while anticipating downward revisions to 2025 GDP and upward revisions to unemployment and inflation projections. Despite potential short-term USD strength, Citi maintains a longer-term bearish dollar outlook through Q3, citing downside risks to the U.S. labor market and term premium concerns.

Analysis

Citigroup anticipates the Federal Reserve will maintain current interest rates at its upcoming meeting, with market attention primarily focused on the Summary of Economic Projections (SEP) and Chair Powell's subsequent press conference. The bank projects an "asymmetric bullish risk" for the U.S. dollar surrounding the event, suggesting that any resultant dollar appreciation should be considered an opportunity to augment existing short positions. Citi's economists foresee the Fed revising its 2025 GDP forecasts downward, while concurrently adjusting unemployment and inflation projections upward. This outlook is coupled with a low threshold for a hawkish surprise; a mere two Fed officials shifting their 2025 rate cut expectations from two to one could alter the median projection, contrasting with current market pricing of approximately 46 basis points in cuts for 2025. Despite this potential for near-term dollar firmness, driven partly by significant existing short dollar positioning among institutional and leveraged investors, Citi reiterates its longer-term bearish stance on the U.S. dollar through the third quarter. This bearish view is underpinned by perceived downside risks to the U.S. labor market and persistent term premium concerns. For the EUR/USD pair, Citi identifies pullbacks towards the 1.14 level as attractive entry points for long euro positions, not expecting the pair to breach the 1.13 support, which aligns closely with the 55-day moving average currently at 1.1307.

Key Decisions for Investors

• Investors might consider any Federal Reserve meeting-induced U.S. dollar strength as a tactical window to initiate or add to short dollar positions, in line with Citi's view on "asymmetric bullish risk".
• Closely scrutinize the Federal Reserve's updated Summary of Economic Projections, particularly for revisions to 2025 GDP, unemployment, and inflation, as these will be critical for gauging future policy direction and subsequent market reactions.
• For currency traders, evaluate establishing long EUR/USD positions on any significant dips towards the 1.14 level, while monitoring the identified support around 1.13, based on Citi's expectation of longer-term dollar weakness.
• Be prepared for potential market volatility stemming from the Fed's communication, recognizing the low threshold for a hawkish shift in the 2025 median rate cut projection, which could impact existing investor positioning that is significantly short the U.S. dollar.