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UBS strategists have revised their EUR/USD forecast, anticipating a test of parity soon due to stronger US economic activity, before a rebound towards the 1.05-1.10 range by year-end. The euro faces pressure from a subdued European economy and potential US trade tariffs, complicating the outlook. Risks include possible Federal Reserve rate hikes and the impact of tariffs on European growth, which could keep the exchange rate below parity.
UBS has revised its EUR/USD forecast, anticipating a test of parity soon due to stronger US economic activity, before a rebound towards the 1.05-1.10 range by year-end. The euro faces pressure from a subdued European economy and potential US trade tariffs, complicating the outlook. Risks include possible Federal Reserve rate hikes and the impact of tariffs on European growth, which could keep the exchange rate below parity.
UBS's Senior US Economist Brian Rose indicated that the robust December jobs report, which showed a significant increase in nonfarm payrolls and a drop in the unemployment rate, diminishes the likelihood of immediate rate cuts by the Fed. While UBS maintains its forecast for two rate cuts in June and September, it emphasizes that such moves will depend on a slowdown in labor market and inflation data. The Fed's recent minutes reflect concerns about persistent inflation, suggesting a cautious approach to monetary policy adjustments.
Recent macroeconomic data and strong third-quarter earnings from major tech companies indicate potential for further market rallies. The US economy grew at an annualized rate of 2.8%, driven by consumer spending, while the Federal Reserve is expected to implement rate cuts, supporting equities. The ongoing AI growth trend is also anticipated to bolster stock performance, particularly in AI-linked sectors.
The US dollar has recently strengthened against key trading partners, driven by rising Treasury yields and stronger-than-expected economic data. However, concerns over fiscal policy and a potential second Trump administration may pressure the dollar, prompting investors to consider hedging strategies and diversifying into other currencies. As inflation shows signs of slowing, the Federal Reserve is expected to adopt a more neutral stance on interest rates, further influencing currency dynamics.
Brian Rose
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