UBS provided an outlook on the EUR/USD currency pair, suggesting that it may test the lower end of the current 1.05–1.10 range in the upcoming months. The firm's analysts predict that the pair will move towards 1.05–1.07 following the recent euro rally, as the European Central Bank (ECB) is expected to start cutting rates in June.
Despite the lack of data fully justifying a rate cut, UBS believes the ECB may be preemptively deciding based on inflation targets not yet met and persistent inflation indicators from wage deals.
The Federal Reserve's cautious stance is contrasted with the ECB's anticipated actions, as UBS anticipates the Fed will wait for data to justify a rate cut, likely occurring in the third quarter of this year.
Looking ahead to next year, UBS forecasts that EURUSD will break above 1.10, despite expecting the ECB to cut rates by 200 basis points by June 2025 and the Fed by only 100 basis points.
This is attributed to several compensating factors, including a projected decrease 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-recessionary environment. UBS also notes that the US dollar's overvaluation is likely to diminish next year, as factors that have driven its strength—such as robust US consumer demand and high interest rates—begin to wane.
However, UBS maintains that the potential for EURUSD to appreciate beyond 1.15 is limited, contingent on an unlikely scenario where a surge 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 anticipates the Fed to initiate a rate cut cycle starting in September.
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