Citi raises euro-dollar forecast, sees slight dollar weakness

Analysts at Citi believe problems are building for the U.S. dollar in the near term, particularly against the euro, although they see limits as to how far the greenback can actually sell off.

The U.S.-based bank on Thursday said it expects the euro to rise to $1.1750 over a three-month horizon from around $1.17 now, citing three main factors:

1. Fed rate hikes get priced out.
2. Solid euro zone growth tailwinds from fiscal spending.
3. Investors shunning the dollar before the U.S. midterm elections.

The Treasury's move this week to double the size of its buybacks at the longer end of the curve adds to the bearishness, Citi said.

But it doesn't expect a broad dollar selloff.

"While the above factors should weigh on the USD in the coming months, we see a limit to how much the USD can realistically sell off," Citi said.

"If we assume no Fed action this year, an ECB hike, and a $75 Brent oil, we land on a EURUSD fair value of around 1.17-1.1720, with overshoot potential towards 1.1750 after factoring in the current mis-valuation."

"EURUSD has struggled to sustain above 1.18 over the past year’s range, and we think that will continue to be the case (with major resistance still at the 200-month moving average, currently 1.1850)."