UBS provided an outlook on the currency pair, suggesting it could test the lower end of the current range of 1.05–1.10 in the coming months. The firm’s analysts predict the pair will move towards 1.05–1.07 following the euro’s recent rally as the European Central Bank (ECB) is expected to start cutting interest rates in June.
Despite the lack of data to fully justify a rate cut, UBS believes the ECB can make pre-emptive decisions based on inflation targets that have not yet been met and persistent inflation indicators from wage agreements.
The Federal Reserve’s cautious stance is in stark contrast to expected ECB action, as UBS expects the Fed to wait until data justify a rate cut, which is likely to occur in the third quarter of this year.
Looking ahead to next year, UBS predicts that the EURUSD will rise above 1.10, despite expectations that the ECB will cut rates by 200 basis points by June 2025 and the Fed by only 100 basis points.
This is attributed to several offsetting factors, including an expected decline in US GDP growth from 2.4% this year to 1.2% in 2025, and an increase in Eurozone growth from 0.6% to 1. 2%.
Furthermore, the euro is expected to benefit from the easing of monetary conditions by other major central banks in a non-recessionary environment. UBS also notes that the overvaluation of the US dollar is likely to decline next year as factors that have driven its strength – such as robust US consumer demand and high interest rates – begin to decline.
However, UBS maintains that the potential for EUR/USD appreciation above 1.15 is limited, subject to an unlikely scenario in which a surge in emerging markets leads to a boom in European exports.
The investment considerations outlined by UBS suggest that the support level around 1.05 for EURUSD should remain solid, especially if the market expects the Fed to initiate a rate cutting cycle in September.
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