UBS Sees Euro Falling Below $1.05 Against the Dollar
UBS has updated its forecast for the EUR/USD pair, predicting increased downside risks that could drive the euro below the $1.05 level against the US dollar. This change in perspective comes as the US economy demonstrates stronger resilience to high interest rates than previously thought, and geopolitical tensions escalate, impacting currency markets.
US Economy Stronger Than Anticipated
Initially, UBS expected the EUR/USD to remain stable within a narrow range with strong support at $1.05. It was believed that investors would find the US dollar less appealing below this level, especially with a projected rate cut by the Federal Reserve in the second quarter. However, UBS now anticipates a delay in the rate cut until the third quarter or later, potentially causing the US dollar to appreciate until economic data justifies a rate reduction.
ECB and Fed Policies Diverge
While the European Central Bank (ECB) is poised to start cutting rates as early as June, the Federal Reserve in the US is hesitant. This contrast in central bank policies could lead to a scenario of US exceptionalism, where the US dollar benefits from a more hawkish Fed and the ongoing search for safe-haven assets.
Long-Term Outlook Remains Positive
Despite short-term challenges, UBS maintains a positive long-term outlook for the EUR/USD pair, expecting a recovery once the Fed begins to lower rates. It is predicted that European economic growth will bounce back next year, aligning with a slowdown in US growth due to high yields. This convergence is anticipated to boost demand for euros, supported by lower global yields favoring risk-on currencies.
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