Investing.com – UBS strategists lowered their forecast for Monday as they expect the currency pair to soon test parity amid firmer US economic activity before bouncing higher by year-end.
The stronger US dollar, supported by robust US economic data, has put increasing pressure on the euro recently.
In contrast, the European economy remains weak, with January’s Purchasing Managers’ Index (PMI) pointing to marginal growth in the services sector and continued contraction in the manufacturing sector.
“Sturdier economic activity in the US is likely to prompt a test of EURUSD parity before the pair moves higher towards the 1.05-1.10 range towards the end of the year,” UBS strategists said Dominic Schnider and Brian Rose in a note.
The inauguration of US President Donald Trump has further complicated the economic outlook and brought US trade tariffs to the forefront of market considerations. UBS suggests the likelihood of a favorable tariff trajectory is low, with expectations leaning towards a more assertive stance, especially towards China.
Strategists said this could lead to a weaker , which would generally impact growth-friendly currencies like the euro, potentially pushing EUR/USD towards parity, with occasional dips below.
While many positive factors are already reflected in the current valuation of the USD, and negative factors in the EUR, UBS notes that a shift in market sentiment would require significant changes in US economic growth, tariff policy or a rebound in European growth . However, the path forward is expected to be complex and non-linear.
The bank also points to the potential for US growth to slow and the European Central Bank (ECB) to end interest rate cuts at the end of June 2025, potentially shifting momentum in the euro’s favor in the second half of the year shift.
In terms of investment recommendations, UBS strategists advise that dips below parity could provide opportunities to unwind excessive long positions in the US dollar.
Technical support for the EUR/USD is around 1.00 and then around 0.985, with resistance around 1.05.
Risks to UBS’s forecasts include possible rate hikes by the Federal Reserve in response to robust economic activity, which could leave EUR/USD below parity, or if US rates significantly impact European growth and the ECB raises rates further decreases, which may also keep the exchange rate below level. parity.
Strategists also note that a faster reversal in EUR/USD could occur if US GDP growth falls below 2% sooner than expected, which would likely lead markets to more rate cuts and a weakening of the dollar prices, which would put the currency pair in trouble again. the range of 1.05-1.10.
