UBS has provided a forecast for the currency pair, suggesting that it may test the lower end of the current 1.05-1.10 range in the coming months. The company's analysts expect the pair to move towards 1.05-1.07 after the euro's recent rise, as the European Central Bank (ECB) is expected to start cutting interest rates in June.
Although there is no data to fully justify a rate cut, UBS believes the ECB may make a proactive decision based on inflation targets yet to be achieved and persistent inflation signals from wage deals.
The Fed's dovish stance contrasts with the ECB's expected actions, with UBS expecting the Fed to wait for data to justify a rate cut, which will likely happen in the third quarter of this year.
Looking ahead to next year, UBS expects the EURUSD to exceed 1.10, although it expects the ECB to cut interest rates by 200 basis points by June 2025 and the Fed by only 100 basis points.
This is due 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 euro area growth from 0.6% to 1.2%.
Furthermore, the euro is expected to benefit from 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 diminish next year, as the factors that have led to its strength – such as strong consumer demand in the US and high interest rates – begin to fade.
However, UBS stresses that the potential for EUR/USD to rise beyond 1.15 is limited, and hinges on an unlikely scenario where a rally in emerging markets leads to a boom in European exports.
Investment considerations identified by UBS suggest that the 1.05 support level for EUR/USD should remain strong, especially if the market expects the Fed to begin an interest rate cutting cycle starting in September.
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