CitiFX expects the pair to face strong resistance around the 1.18 area and maintains an overall bullish outlook on the U.S. dollar for 2026.
The bank sees scope for long euro positions to be unwound and believes EUR/USD could decline toward the 1.10 area by mid-year.
According to Citi, cyclical factors are set to be the key drivers of U.S. dollar performance this year, with potential for stronger U.S. economic data.
Analysts also point to possible distortions in the labor market linked to immigration policy. Weak employment data from smaller firms may be masking job growth and rising wage pressures within larger corporations.
As for Federal Reserve policy, Citi does not expect the new Fed Chair to support interest rate cuts unless economic conditions clearly justify such a move.
The bank does not anticipate interest rate cuts by the European Central Bank in 2026, but argues this is unlikely to support the euro, as positive expectations are already priced in.
Despite market focus on higher fiscal spending, Citi notes that a large share of defense procurement is carried out outside the eurozone, limiting potential upside support for the European currency.
