UBS provided a forecast for the currency pair, suggesting that it could test the lower limit of the current 1.05-1.10 range in the coming months. The firm’s analysts forecast the pair to move towards 1.05-1.07 following the euro’s recent rally as the European Central Bank (ECB) is expected to begin cutting rates in June.
Although there is no data to fully justify rate cuts, UBS believes the ECB may be making a pre-emptive decision based on inflation targets not yet met and persistent inflation figures from wage deals.
The Fed’s cautious stance contrasts with the ECB’s expected action, as UBS expects the Fed to wait for data to justify a rate cut that is likely to occur in the third quarter of this year.
Looking ahead to next year, UBS forecasts EURUSD to rise above 1.10, despite expectations the ECB will cut rates by 200 basis points by June 2025 and the Fed by just 100 basis points.
This is due to several offsetting factors, including a projected 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%.
Moreover, the euro is expected to benefit from easing monetary conditions by other major central banks in a non-crisis environment. UBS also noted that the overvalued US dollar is likely to ease next year as factors that have contributed to its strength, such as robust US consumer demand and high interest rates, begin to ease.
However, UBS says the upside potential for EURUSD above 1.15 is limited and depends on the unlikely scenario that growth in emerging markets leads to a boom in European exports.
Investment considerations outlined by UBS indicate that the support level around 1.05 for EURUSD should remain solid, especially if the market expects the Fed to begin a rate cutting cycle starting in September.
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