UBS Lifts EUR/USD Forecast to 1.20 on Expected Fed-ECB Policy Divergence

UBS has increased its price forecast for the EUR/USD exchange rate to 1.20 from a previous target of 1.17, citing a growing divergence in the monetary policy paths of the U.S. Federal Reserve and the European Central Bank (ECB).

Updated Recommendation

In a note to clients, the investment bank reiterated a long position on the currency pair that was first recommended on July 16 at a level of 1.1460. Alongside the new price target, UBS also raised its stop-loss level on the trade to 1.15 from 1.13.

The firm's analysts pointed to a series of recent economic data releases as the primary driver for the revised outlook. They noted that U.S. economic reports have raised doubts about the need for further interest rate increases, while European data has shown more resilience than markets had anticipated.

Contrasting Central Bank Paths

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According to UBS, the Federal Reserve is expected to keep interest rates unchanged at its September meeting, a move the bank believes will effectively close the window on the current tightening cycle. Markets are increasingly pricing out the possibility of future Fed rate hikes, the note said.

In contrast, UBS anticipates that the ECB is likely to deliver another rate hike. This view is supported by stronger economic performance in the eurozone, which has been bolstered by fiscal easing measures. This divergence is expected to favor the euro over the U.S. dollar.

Market Impact

As a result of these contrasting central bank outlooks, UBS projects that the EUR/USD pair will gradually trend higher. The combination of a pausing Fed and a still-hawkish ECB creates a fundamental tailwind for the euro, according to the firm's analysis.