Citi Advises Fading Euro Rallies as Warsh Pick May Disappoint Hawkish Traders

Citigroup has issued a tactical trading recommendation advising clients to sell into any strength in the euro, warning that the expected appointment of Kevin Warsh as Treasury Secretary under a potential second Trump administration may fall short of market expectations for aggressive fiscal conservatism.

Market Positioning and the Warsh Factor

The call, published by Citi’s foreign exchange strategy team, centers on the view that currency markets have already priced in a hawkish fiscal stance from Warsh, a former Federal Reserve governor. If his actual policy approach proves more pragmatic or less confrontational on trade, the euro could see short-term rallies that would present selling opportunities rather than trend reversals.

“We see limited upside for EUR/USD from current levels,” the note stated, adding that any bounce driven by a perceived dovish surprise from Warsh would likely be capped by the underlying divergence in monetary policy between the European Central Bank and the Federal Reserve.

Why This Matters for FX Traders

The euro has been under sustained pressure against the dollar, trading near multi-year lows as markets weigh the impact of potential US tariffs, a stronger US economy, and a Fed that remains cautious on rate cuts. Citi’s advice to “fade” rallies — a term meaning to sell into price increases — reflects a conviction that the structural drivers favoring the dollar remain intact.

Analysts point to the ECB’s own easing cycle, which is expected to continue through 2025, as a fundamental headwind for the single currency. Even if Warsh signals a softer stance on tariffs, the interest rate differential between the US and eurozone is unlikely to narrow enough to sustain a euro recovery.

What a Warsh Treasury Would Mean

Kevin Warsh, a potential nominee for Treasury Secretary, is widely regarded as a fiscal hawk. However, his past comments on trade policy and currency intervention suggest he may prioritize stability over confrontation. If his confirmation hearings or early statements disappoint those expecting aggressive tariff action or a weaker dollar policy, the euro could initially strengthen — but Citi argues this would be temporary.

The bank recommends using such rallies to build short euro positions, targeting further declines toward parity with the dollar.

Conclusion

Citi’s analysis underscores a broader market consensus that the dollar’s dominance is unlikely to be challenged in the near term. For traders, the key takeaway is to avoid chasing euro strength and instead position for renewed dollar gains. The Warsh appointment, while significant, may not alter the macroeconomic forces that have driven the dollar higher.

FAQs

Q1: What does ‘fade the rally’ mean in forex trading?
It is a strategy where traders sell into a price increase, expecting the move to reverse. In this context, Citi advises selling the euro when it rises on Warsh-related news.

Q2: Why would Kevin Warsh disappoint hawks?
Hawks expect aggressive trade tariffs and a weaker dollar policy. If Warsh takes a more moderate or pragmatic approach, markets may reduce their hawkish bets, temporarily boosting the euro.

Q3: Is EUR/USD likely to reach parity?
Citi and several other major banks see parity as a realistic target if the Fed remains hawkish and the ECB continues cutting rates, though timing remains uncertain.