UBS lowers EUR/USD forecast, sees a parity check quickly

Investing.com — UBS strategists lowered their forecast for the EUR/USD on Monday as they anticipate the forex pair to check parity quickly amid firmer US financial exercise, earlier than rebounding larger once more towards year-end.

The stronger US greenback, bolstered by sturdy financial knowledge within the US, has been more and more pressuring the euro recently.

In distinction, Europe’s financial system stays subdued, with January Buying Managers’ Index (PMI) readings indicating marginal progress in providers and a continued contraction in manufacturing.

“Firmer US financial exercise is more likely to set off a check of EURUSD parity, earlier than the pair strikes larger once more into the 1.05-1.10 vary towards the tip of the yr,” UBS strategists Dominic Schnider and Brian Rose stated in a observe.

Additional complicating the financial outlook, the inauguration of US President Donald Trump has introduced US commerce tariffs to the forefront of market concerns. UBS means that the chance of a benign tariff trajectory is low, with expectations leaning in the direction of a extra assertive stance, significantly in opposition to China.

Strategists stated this might result in a weaker Chinese language yuan, which might typically have an effect on pro-growth currencies just like the Euro, doubtlessly driving the EUR/USD to parity with occasional dips beneath.

Whereas many optimistic elements are already mirrored within the present valuation of the USD, and destructive elements within the EUR, UBS notes {that a} shift in market sentiment would require important modifications in US financial progress, tariff insurance policies, or an uptick in Europe’s progress. Nevertheless, the trail ahead is anticipated to be complicated and non-linear.

The financial institution additionally factors out the potential for US progress to decelerate and the European Central Financial institution (ECB) to sign an finish to fee cuts by late June 2025, doubtlessly shifting the dynamic in favor of the Euro within the second half of the yr.

When it comes to funding suggestions, UBS strategists advise that dips beneath parity might provide alternatives to cut back extreme lengthy positions within the US greenback.

Technical assist for the EUR/USD is seen round 1.00 after which 0.985, with resistance round 1.05.

Dangers to UBS’ forecast embrace attainable Federal Reserve fee hikes in response to sturdy financial exercise, which may hold the EUR/USD beneath parity, or if US tariffs considerably impression European progress and the ECB cuts charges additional, doubtlessly additionally sustaining the trade fee beneath parity.

Strategists additionally observe {that a} faster reversal within the EUR/USD may happen if US GDP progress falls beneath 2% earlier than anticipated, which might probably result in markets pricing in additional fee cuts and a weakening of the greenback, pushing the forex pair again into the 1.05-1.10 vary.