USD energy is prone to persist in 1H25: UBS

Investing.com — The US greenback (USD) has entered 2025 in a formidable method, with the greenback index (DXY) reaching 110, its highest stage since late 2022. In response to UBS strategists, the forex’s upward momentum, fueled by sturdy US financial knowledge, is anticipated to persist by means of the primary half of the yr.

UBS factors to a number of components driving USD energy. Sturdy nonfarm payroll and buying managers’ index knowledge have bolstered US financial sentiment, whereas greater yields proceed to assist the buck.

Against this, macroeconomic circumstances in different main economies stay combined. Progress in Europe stays subdued, whereas China, regardless of a forecasted 5% year-over-year growth within the fourth quarter of 2024, faces challenges in offsetting USD momentum amid lingering US tariff dangers.

“With US tariff dangers looming giant, stronger exercise in China is unlikely to shift investor sentiment and stall the USD rally, in our view,” UBS strategists led by Dominic Schnider mentioned in a observe.

“In our view, near-term USD energy is prone to persist in 1H25 with room to overshoot (DXY probably reaching 115),” they added. Strategists additionally highlighted that elevated speculative lengthy positions within the greenback hinge on constantly sturdy US knowledge to maintain appreciation.

The divergence in macroeconomic efficiency and financial coverage can be a crucial driver of the buck’s energy.

Whereas the US Federal Reserve is anticipated to keep up its present coverage price, different central banks, notably within the Eurozone, are prone to reduce charges additional. This divergence provides to the potential for USD outperformance, with UBS forecasting the euro to commerce under parity with the greenback within the coming months.

Furthermore, tariff dangers stay a key issue. Proposals for common tariffs as excessive as 10% and focused tariffs of as much as 60% on Chinese language imports might additional improve the greenback’s enchantment. “A big a part of the USD energy will be attributed to higher macro knowledge—thus tariff dangers nonetheless have room to strengthen the USD within the brief time period,” strategists defined.

On this mild, UBS expects the EUR/USD pair to drop under parity in early 2025, whereas the GBP/USD is projected to slip under 1.20. The financial institution additionally adjusted its USD/CHF forecast to 0.93 for March 2025, up from a earlier estimate of 0.89.

Trying forward, UBS stays cautious about extrapolating USD energy all year long.

“We nonetheless assume that 2025 might be a narrative of two halves—energy in 1H, and partial or full reversal in 2H,” the strategists commented. “The truth that the USD is buying and selling at multi-decade highs in strongly overvalued territory and that investor positioning is elevated underpin this narrative, in our view.”