Citi analysts caution that the recent rally in the euro against the U.S. dollar may be unsustainable, suggesting that EUR/USD could retrace to 1.0530 in the near term.According to Citi, two key factors have contributed to the euro’s recent strength: increased fiscal spending plans within the European Union and softer-than-expected U.S. economic data. However, the bank believes that the euro is trading at excessive levels when compared to relative real yields, a condition that has historically led to corrections.
Market sentiment appears overly bullish, with demand for euro call options reaching historically high levels—often a signal of a potential top in the currency pair. While fiscal stimulus is expected to support the euro in the long run, Citi warns that its actual economic impact will likely take time to materialize, with major effects not expected until after 2026.
On the U.S. side, weaker economic data has fueled a rally in Treasury bonds while German Bunds have lagged. Citi, however, views this as a temporary market distortion and has positioned its trades accordingly, shorting 10-year U.S. Treasuries against long positions in German Bunds.
The bank also highlights potential risks from U.S. labor market dynamics, predicting that the unemployment rate could rise to 5.0% by mid-year. If realized, this could impact global growth expectations. Additionally, ongoing trade tensions—particularly potential tariffs on Canada and Mexico—could weigh on the euro, given Europe’s substantial trade surplus with the U.S.
From a technical perspective, EUR/USD is currently testing a key resistance zone after breaking previous levels. Citi acknowledges that a correction may be imminent, with the pair potentially retreating to 1.0530, an area that previously acted as a breakout level.
While traders remain cautiously optimistic, Citi’s outlook suggests that the euro may face headwinds in the coming weeks.
HSBC Adjusts GBP-USD Forecast Amid Economic Concerns
HSBC (LON:HSBA) has revised its outlook for the British pound against the US dollar, citing recent gains fueled by the euro’s strength.
GBP-USD recently hit its highest level since November, benefiting from a strong EUR-USD rally. However, HSBC warns that ongoing economic challenges in the UK could limit further upside potential.
The UK’s commitment to increasing defense spending and investing in European partnerships is seen as a positive move for the economy. However, Paul Mackel, Global Head of FX Research at HSBC, highlighted that the UK’s defense industry remains relatively small, contributing only 1.7% of total exports and 0.5% of GDP in 2023.
Mackel pointed out that sluggish economic growth and fiscal constraints continue to weigh on the UK. While wage growth and services inflation have kept monetary policy tight, weakening labor market data suggests that the Bank of England may lean towards rate cuts in the future.
“Economic growth remains stagnant, and government fiscal constraints limit room for stimulus,” Mackel noted. “With uncertainty surrounding inflation and global trade tensions, GBP is at risk of underperforming.”
HSBC expects GBP-USD to face downward pressure, especially with US tariff policies adding instability to global trade. The bank forecasts the currency pair to drop to 1.23 by Q4 2025.
Bank of America (BofA) analysts have revised their long-term forecasts for the U.S. dollar, now anticipating a stronger performance through the end of 2025. This adjustment follows the U.S. election results, which have prompted a shift in consensus among currency forecasters. Previously bearish on the U.S. dollar for the remainder of 2024, the consensus has now turned more bullish. 
