Citi: If Warsh fails to meet hawkish expectations, sell EURUSD on rallies

Overview

This is a Citi global FX strategy report centered on how Kevin Warsh's first FOMC meeting as chair could affect the USD, EUR, and G10 FX trading. The report argues that the market is already leaning toward expecting a hawkish statement and SEP adjustments, so unless Warsh explicitly validates rate hike pricing in the press conference, the USD is unlikely to break out of its 12-month range immediately. Citi prefers to use USD weakness around the FOMC to sell EURUSD on rallies, while also believing that improving risk sentiment will support a recovery in carry trades.

Core views

The core views of the report are: first, hawkish changes in the FOMC statement and dot plot have most likely already been priced in, and those changes alone are insufficient to trigger a significant FX reaction; second, Warsh's attitude toward the market's current roughly +18bps of rate hike pricing for this year is the key short-term variable; third, under the base case the USD remains range-bound, but the risk distribution is skewed to the upside for the USD because any hike signal could prompt the market to bring forward and expand rate hike pricing; fourth, EURUSD still has downside room in the medium term, with Citi targeting 1.14 and recommending shorts near 1.1660-1.1680; fifth, tactical downside risks for risk assets are easing, carry trades are likely to recover, and the preferred funding currencies are EUR and CAD.

Analysis framework

The report combines Fed policy expectations, market rate pricing, inflation and geopolitical factors, USD positioning, DXY valuation and technical levels, and risk sentiment indicators to form FX trading recommendations. The analytical focus is not on a single macro data point, but on assessing how much hawkish information the market has already priced in and whether the Warsh press conference will change marginal pricing in front-end rates and the USD.

Methodology notes

• Macro policy event analysisFOMC expectation gap framework

  Compare the marginal difference between market expectations and policy communication

  The report argues that hawkish changes such as removing the easing bias from the statement, revising core PCE forecasts higher, and shifting the 2026 dot median to unchanged have already largely been priced in by the market, and therefore focuses more on whether Warsh validates or downplays current rate hike pricing in the press conference.

• FX technical and valuation analysisDXY range breakout and EURUSD resistance levels

  Use long-term channels, moving averages, and historical key levels to identify trade trigger zones

  The report notes that DXY is close to fair value and near the bottom of its 12-month consolidation range, so a confirmed breakout should be followed; EURUSD, meanwhile, faces resistance around 1.1660-1.1680 from historical key levels and multiple moving averages.

• Risk sentiment and carry tradesCarry trade funding selection

  Select unattractive low-yield funding currencies to support carry trades when risk sentiment improves

  The report argues that a potential US-Iran agreement, successful tech IPOs, and a less eventful Fed meeting could reduce volatility and support risk assets, allowing carry trades to recover, with EUR and CAD better suited as funding currencies given their combination of yield and growth outlook.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• EURUSD

  The core trading recommendation is to sell on rallies.

  Strengths

  If relative growth differentials continue to support the USD, EURUSD could decline toward 1.14.

  Weaknesses

  If the USD sees knee-jerk selling after the FOMC, EURUSD could first rebound toward the resistance zone.

  Comparison

  Compared with directly chasing USD longs, the report prefers to use EURUSD rebounds to establish shorts.

  Risks

  If global front-end yields peak and fall rapidly, or if the USD continues to be sold after long positions are unwound, EURUSD could extend higher.

• DXY

  Used to gauge whether the USD breaks out of its 12-month consolidation range.

  Strengths

  If Warsh validates rate hike pricing, DXY could stage a meaningful breakout and trigger momentum buying.

  Weaknesses

  DXY is close to fair value, and USD longs have already been unwound, limiting downside from a purely dovish disappointment.

  Comparison

  A breakout signal in DXY is seen as more important than the one-day FOMC reaction and ideally needs confirmation over multiple days.

  Risks

  If Warsh turns clearly dovish and leads the market to price out hikes, DXY could remain in its range.

• USDJPY

  Requires tactical monitoring in a scenario of knee-jerk USD weakness.

  Strengths

  If Japan's Ministry of Finance intervenes with the help of a JPY-positive catalyst, the yen could receive additional support.

  Weaknesses

  This scenario is not the report's core base-case trade.

  Comparison

  Compared with EURUSD, USDJPY's reaction depends more on the timing of Japanese official intervention and speculative JPY short positioning.

  Risks

  Without intervention or if the USD strengthens again, downside in USDJPY may be limited.

• G10 carry trades

  May recover as risk sentiment improves.

  Strengths

  A potential US-Iran agreement, successful tech IPOs, and a low-volatility environment are favorable for carry trades.

  Weaknesses

  Fundamentals for some high-beta currencies remain weak, limiting carry returns.

  Comparison

  The report prefers funding with EUR and CAD, while viewing USD as a better G10 carry long.

  Risks

  If geopolitical conflict re-escalates, oil prices are hit again, or an unexpectedly hawkish Fed causes risk assets to fall, carry trades could suffer.

• AUD

  Can serve as a proxy for risk assets, but fundamental support is weakening.

  Strengths

  AUD could outperform again if risk sentiment recovers.

  Weaknesses

  Recent softer data, nearly fully priced hawkish RBA expectations, and slowing China data weaken the fundamental case.

  Comparison

  AUD has higher risk sensitivity than CAD, SEK, and NZD, but its fundamentals are less solid than a pure risk-proxy thesis.

  Risks

  If China data continue to weaken or global risk appetite falls back, AUD performance could come under pressure.

• CAD

  Seen as one of the more attractive carry funding currencies.

  Strengths

  Its combination of yields and growth outlook makes CAD suitable for the funding leg.

  Weaknesses

  The report believes CAD fundamentals remain weak.

  Comparison

  Like EUR, CAD is prioritized as a funding currency rather than a carry long.

  Risks

  If Canadian fundamentals improve or oil prices rebound and lift CAD, the funding leg could come under pressure.

• NOK

  May be sensitive to further pullbacks in oil prices.

  Strengths

  If oil prices stabilize, pressure on NOK may ease.

  Weaknesses

  If oil prices continue to fall and Norges Bank shifts to selling NOK, NOK may underperform.

  Comparison

  Compared with AUD, NOK is more directly affected by oil prices and Norges Bank FX operations.

  Risks

  There is uncertainty around the path of oil prices and central bank FX operations.

Key data

• Report date2026-06-15The report header shows the publication time as 15 Jun 2026 15:42:00 ET.
• Market rate hike pricing+18bps through year-endThe report says the market has priced in about 18bps of hikes by year-end and fully prices the first hike by March 2027.
• EURUSD medium-term target1.14Based on relative growth differentials, Citi expects EURUSD to move toward 1.14 and does not rule out downside overshoot.
• EURUSD short reference resistance1.1660-1.1680The report recommends adding to EURUSD shorts on USD weakness around the FOMC, especially near this resistance zone.
• FOMC base-case assessmentNo major hawkish surpriseThe report believes hawkish adjustments in the statement, SEP, and dot plot have mostly been priced in ahead of time.
• DXY technical backdrop12-month consolidation rangeIf Warsh suggests hikes remain on the table, DXY could break out of its 12-month consolidation and trigger momentum buying.

Impact & implications

In terms of investment implications, the report does not recommend chasing EUR strength, but instead views short-term USD weakness around the FOMC as an opportunity to add to EURUSD shorts. If Warsh maintains ambiguous or neutral language, the USD may continue to trade in a range while the environment for risk assets and carry trades improves; if Warsh explicitly validates market rate hike pricing, the USD's upside convexity could be significantly greater than its downside risk. In G10 FX, USD is seen as a better carry long, while EUR and CAD are more suitable as funding legs, and AUD may benefit from improved risk sentiment though its fundamental support has weakened.

Risks

• If Warsh explicitly validates market rate hike pricing, it could drive a rapid USD rally and a breakout from the range.
• If the market needs more evidence that inflation breadth has peaked, rate hike pricing may be hard to fully price out.
• If progress on a US-Iran agreement or ceasefire proves uneven, oil prices and risk sentiment could deteriorate again.
• If Japan's Ministry of Finance intervenes during USD weakness, USDJPY could experience nonlinear volatility.
• If global front-end yields have not peaked, or if the USD continues to be supported by relative growth advantages, any EUR rebound may prove hard to sustain.

What to watch

• Whether the Warsh press conference validates, downplays, or sidesteps current market rate hike pricing.
• Whether the FOMC statement removes the easing bias, and changes in core PCE projections and the 2026 dot median.
• Whether DXY can confirm a breakout from its 12-month consolidation range over multiple days.
• EURUSD price action in the 1.1660-1.1680 resistance zone.
• Progress on a US-Iran agreement, recovery in Strait of Hormuz traffic, and changes in oil price forecasts.
• Risk assets, volatility indicators, tech IPOs, and performance in the upcoming earnings season.
• Whether Japan's Ministry of Finance carries out FX intervention with the help of a JPY-positive catalyst.