Story
UBS Lifts EUR/USD Forecast to 1.20 on Fed-ECB Policy Divergence Bet
Summary
UBS has raised its price target for the euro against the U.S. dollar, citing expectations that the Federal Reserve will pause its rate hikes while the European Central Bank continues to tighten policy.
UBS has raised its price target for the EUR/USD currency pair to 1.20, up from a previous forecast of 1.17. The bank reaffirmed its bullish stance, citing an expected divergence in monetary policy between the U.S. Federal Reserve and the European Central Bank (ECB).
Revised Forecast Details
In a note to clients, UBS outlined the adjustments to its trade recommendation, which was first initiated as a long position on July 16 at the 1.1460 level. The bank's updated parameters are:
- New Price Target: 1.20 (from 1.17)
- New Stop-Loss: 1.15 (from 1.13)
These changes reflect increased confidence in the euro's potential for appreciation against the dollar.
Contrasting Central Bank Paths
AdThe forecast is rooted in differing economic signals from the two regions. According to UBS, recent U.S. economic data has weakened market expectations for further interest rate hikes from the Federal Reserve. In contrast, economic reports from Europe have generally been stronger than anticipated.
UBS analysts believe the Federal Reserve will hold interest rates steady at its September meeting, which they interpret as the effective end of the current tightening cycle. During the same period, the bank expects the European Central Bank will implement another rate hike, further widening the policy gap.
Market Implications
This anticipated divergence is the primary driver behind the upgraded forecast. UBS noted that the market is gradually pricing in the end of the Fed's rate-hike campaign.
Furthermore, the bank stated that continued support from fiscal easing policies in Europe provides an additional tailwind for the region's economy. UBS concluded that this combination of factors is likely to provide sustained upward momentum for the EUR/USD exchange rate.
Read next
More on Forex
Canadian Dollar Slips to One-Month Low as Hawkish Fed Fuels U.S. Dollar
The Canadian dollar weakened to its lowest level in a month against the U.S. dollar after the Federal Reserve raised interest rates and indicated another hike is likely this year, widening the policy divergence with the Bank of Canada.
UBS Forecasts EUR/CHF to Retest 0.96 as Swiss Franc Lags on Low Yield
Analysts at UBS project the euro could strengthen to 0.96 against the Swiss franc, citing the franc's low yield and the Swiss National Bank's expected dovish stance compared to other G10 central banks.
Pound Sterling Rally May Fade on UK Fiscal Concerns, Citi Says
Analysts at Citi suggest any near-term strength in the British pound following the Bank of England's meeting is unlikely to last, citing significant fiscal risks associated with the upcoming October budget.
Pound Sterling Declines as Fed Rate Hike Looms and UK Inflation Data Tempers BoE Bets
The British pound fell against the U.S. dollar on Wednesday as markets braced for an almost certain Federal Reserve interest rate increase. Domestically, a rise in UK headline inflation failed to sway expectations for a more aggressive Bank of England, adding to the currency's weakness.