UBS’S TAKE
- The euro remains supported by the ECB’s hawkish stance and commitment to price stability, though near-term growth risks persist.
- Strong US domestic data and a more hawkish Fed have more than offset the recent pullback in oil prices, supporting a firm USD. The upcoming midterm elections may weigh on the dollar later in the year.
- We expect EURUSD to trade around 1.16, with risks skewed to the downside in the short run. Toward the end of the year, we anticipate structural headwinds for the USD to re-emerge as the Fed moves into a position to cut rates, which should push the pair toward 1.20.
ECB hawkishness supports the euro, despite soft economic activity
The euro has remained stable, supported by the European Central Bank’s (ECB) hawkish stance despite a slowing growth outlook. The ECB raised policy rates by 25bps in June and signaled that further tightening remains possible, reaffirming its commitment to price stability even as the energy crisis weighs on activity. This approach has kept the euro resilient, with EUR pairs trading in tight ranges. However, the ECB’s focus on inflation versus growth may fade should oil prices slide further. In the near term, we expect the euro to move sideways versus the USD, as US data are likely to remain robust with the Federal Reserve also leaning
more hawkish.
US domestic strength offset fading external tailwinds
The US dollar, which has benefited from elevated oil prices and geopolitical tensions, now faces a range of cross currents. Oil prices are retreating following the US-Iran peace deal, while stronger US economic data and a more hawkish Fed with new Chair Kevin Warsh are supporting the dollar. In the short term, we believe the latter factors more than offset the impact of lower oil prices.
We have revised our expectations for the next Fed rate cut from the end of this year to early next year, while markets are now pricing in a possible rate hike by year-end. Expectations of a Fed rate hike should keep EURUSD around 1.16, with risks skewed to the downside in the near term. However, bouts of USD strength are likely to remain limited. A global overallocation to USD assets is making the dollar less responsive to positive US news, in addition to existing structural headwinds.
Looking further ahead, we still expect US rates to move lower, now projected for 2027. Such a shift should take the wind out of the dollar’s sails and allow the EURUSD pair to move higher over time.
Prospects: We expect EURUSD to trade stably in the short run at 1.16 or below. Medium to longer term, we retain the view that EURUSD should gravitate toward 1.20 amid structural USD negatives. This view still makes the USD a sell on rallies for us.
Boundaries: The next major support is at 1.14, followed by 1.12, while resistance stands at 1.18 and 1.20, with further resistance at the 2018 and 2021 highs between 1.23 and 1.25.
Risks: Ongoing economic strength in the US versus Europe could push EURUSD lower into a 1.10-1.15 range. Conversely, a Fed on hold while economies outside the US recover from the oil price shock should favor a quicker move up in EURUSD to our longer-term targets.
Προσθήκη του MarketsReport.gr στην Google